November 19, 2009

Goldman’s $500 Million Controversy


Goldman just made a big charitable commitment - and stirred up quite a bit of controversy. Did the company design or execute the program poorly? Are its critics being unreasonable? In this post, I examine the program and some of the reactions to it, consider what could be going wrong, and summarize the analysis of several experts in a recent discussion of the issue in the New York Times. What's your take?

Last week, I wrote about the Goldman Sachs Foundation and the company's employee giving activities. In that post, I postulated that the company was using philanthropy in part to mitigate widespread discomfort (too weak a word?) with its large employee bonuses. I also complained about comments like the following statement from a 2007 New York Times article about one of the firms' giving vehicles: "Cynics who have watched the wealth creation at Goldman might think that the program is little more than a public relations effort to mask the gigantic bonuses it is expected to pay out starting in early December…" Instead, I argued, "I don't think that's cynical at all, though, nor do I think it takes anything away from the firms' - or its partners' - philanthropy. If the company is recognizing a risk, and utilizing philanthropy as one of the tools it uses to minimize that risk, that's good strategic corporate philanthropy."

Based on general reactions to one news story this week, though, it looks like a lot of people disagree with me! This week, Goldman announced a $500 million commitment to a new "10,000 Small Businesses" program. According to an article that appeared on the New York Times website on November 17, the company will "provide $200 million to pay for small-business owners to get business and management education at local community colleges and other places," offer $300 million of grants and small loans to small businesses, and also provide mentoring (by employee volunteers) and networking opportunities to these same small-small business owners. Yesterday, an article in the Wall Street Journal gave slightly more detail, stating that $250 million of the total would be distributed as loans, with an equal quantity in grants. Warren Buffet and Michael Porter (HBS professor, major contributor to the field of strategy, founder of a nonprofit that fosters entrepreneurship and economic development in inner cities) are among the effort's advisers. The company's own discussion of the initiative is here.

 Theoretically, this program makes a lot of sense as a strategic philanthropy effort. Currently, one of Goldman's major problems is that, as the New York Times put it, "it has become a punching bag for an industry that is seen by many to have benefited unfairly from billions in taxpayer dollars." People are angry that the government bailed out the financial sector, and now Goldman's employees, according to the same article, has earmarked $16.7 billion "so far" this year for employee pay. Meanwhile, unemployment remains high and the general public hasn't seen the end of this recession.

As a result, it makes sense that Goldman is investing in an effort that, if successful, is presumably designed to stimulate economic growth, from the bottom up. It is investing in small businesses, providing two resources that it has in abundance - cash and employee talent - to a population that could utilize those two resources to grow, creating social benefit. There is a direct connection between the problem Goldman faces (anger over its unequal share of the wealth) and the solution it is offering (creating a program to generate more wealth for the people who currently have a smaller piece of the pie), and it is utilizing resources that it has unique access to in order to provide that solution.

Simple, right? Um, apparently not, if the 97 comments (as of the time of this post) reacting to the Wall Street Journal article are any indication. While Goldman certainly has its defenders among WSJ commenters, responses like these were common (the commenter's name follows the quote):
  • "The 500 million would be pro rata 2.5% of their annual bonus this year, which is cheap buy-out for the public opinions…" (JAMES DREITO)
  • "The amazing part is these Goldman "masters of the universe" think we are all that stupid that we will fall for this not so subtle act of contrition...it sure must be nice to own both political parties and get away with anything and everything." (John McIlvenna)
  • "Goldman's actions are sickening. After STEALING tens of billions of dollars from the US taxpayer, Goldman is now insulting America with this cheap trick. Goldman Sachs must be destroyed before it destroys the US." (Peter Marlow)
  • "What a crock. A despicable move by Goldman to appease the masses. My bet is less than 10% of the "500 million" is ever distributed. Certainly less than $50 miliion (SIC) will ever be actually given away. Who are these creeps kidding? Endless pox on them." (Michael Smith)
  • "Wow, how generous of the crooks who helped create a financial meltdown, then took $64 Billion in tax payer money to make themselves whole only to pay the people who caused this billions in bonuses. It now makes sense that they should get some good Public Relations from our money and ....another tax break for handing out charity to us poor folk west of the Hudson." (TOM OKEEFE)
  • "Blood money." (Dirk Dreux)

So what did Goldman do wrong? I can think of a few possible issues (but I feel like these ideas could use some sharpening or refinement, and I'd love your thoughts on how to do so):
  • Corporate philanthropy, and CSR more broadly, can definitely help mitigate reputational and other types of risk, but it doesn't cause other acts that people judge negatively to go away. In fact, if the CSR activity seems hypocritical, people tend to react really negatively. Is that what's going on here? The fact that many commenters (and journalists) brought up a recent quote by the Goldman CEO, where he claimed that the firm is "doing God's work", suggests that this is a factor.
  • CSR can certainly promote trust, but maybe companies need a baseline of trust that is built through their general business activities. Otherwise, you get reactions like the ones revealed in some of the comments quoted above, with people questioning whether the company can be trusted to carry out the program as promised.
  • While I still believe that PR (and other business) benefits are a legitimate motivation for CSR, really good business benefits most often (though not always) come from a program's outputs and results, not just the inputs. That is, Goldman is likely to get real credit if and when it can show that it's donation has promoted economic growth. A good illustration of this viewpoint comes when the New York Times article quotes Andrew Stern, president of the Service Employees International Union, regarding his thoughts on the Goldman commitment: "It's a down payment, a step forward and hopefully a precursor of a different discussion — in the long run, how do we build an economy where everyone can share in the success?" he said. "But if this is an isolated public relations activity, it's insufficient."
  • Or maybe I'm just in the minority, and the majority of people believe that corporate philanthropy should not benefit the business, and the companies should carry out philanthropic activities because "it's the right thing to do".
Today, the New York Times, in its Room for Debate section, tried to hash out some of these questions. It asked, "Does the firm have an obligation to make philanthropic efforts, given that it benefited from the federal support? How can the most be made of this opportunity? Should Goldman be committing more than $500 million, based on its bottom line?" It pulled together a great panel to weigh in on the matter, including:
  • Matthew Bishop and Michael Green, "Philanthrocapitalism"
  • Robert Johnson, economist
  • Nicole Gelinas, Manhattan Institute
  • Nomi Prins, senior fellow, Demos
  • Peter Firestein, author
  • Charles Best, DonorsChoose.org
Bishop and Green reacted similarly to Andrew Stern. They argue, "If this announcement is the first of many acknowledgments by the leading lights of the finance world that the winners in our economic system have a responsibility to ensure that the benefits are spread throughout society, then Goldman C.E.O. Lloyd Blankfein's recent claim that the firm is "doing God's work" may not be so ridiculous."

Johnson focuses not on the donation, but on what he sees as the structural problems that made it possible: "...Goldman Sachs would not have that $500 million of spiritual bounty to distribute if it weren't for the U.S. taxpayers. Charitable giving is nice, but we can't take our eye off the ball when it comes to the need to repair our structure of government and address the undue influence of Goldman Sachs and the other powerful financial sector firms." In other words, in his view, the philanthropic program does not address the root problem.

Gelinas is concerned that Goldman's efforts will be too successful as a PR initiative, particularly among politicians. She argues, "That is, Goldman makes tons of money thanks to an implicit taxpayer "too-big-to-fail" subsidy, and it will give a little bit of that money back in ways that please important political constituencies like the National Federation of Independent Business on the right and the National Urban League on the left, each of which will help the firm with its small-business undertaking. Because it sweetens too-big-to-fail politically, the charitable initiative is bad for the economy and society."

Along somewhat similar lines, Prins suggests that the target audience for this initiative - not in terms of beneficiaries, but in terms of whom Goldman is looking to influence - is not in fact the general public, but the government: "Mr. Blankfein missed the opportunity to be genuinely concerned about the little people about a year and a bailout ago. So he's sacrificing a $500 million pawn and by doing so, he may placate the government — a more necessary a task to him than being universally loved."

Firestein's argument draws on two of the theories I laid out above, including both the idea that the public will reject perceived hypocrisy and that a baseline of trust is required before companies can use social engagement to augment that attribute. He says, "It's a lot of money (to anyone but Goldman) but it does nothing to convey a change in the bank's attitude toward the society around it." Furthermore, he argues, "That Goldman has allowed its reputation to sink so low as to make half a billion seem like a token causes damage far beyond the bank itself. It may undermine public sentiment toward truly needed financial entities for a long time to come."

Finally, Best shares his ideas for how Goldman could improve the execution of this project. He also shares his own experience as the recipient of Goldman funding: "I know from personal experience what Goldman Sachs funding can do for a small enterprise." In this way, though not explicitly, he draws on the idea that results are important, holding up Goldman's success in helping him as evidence that perhaps they can do this well, too.

What do you think? Are Goldman's critics being unreasonable? Is the company's corporate philanthropy strategy a poor solution for the problem the company is trying to address, or has it done a poor job executing this strategy? Do motives matter, and if not, where does hypocrisy come in? Or does this situation reveal that there are simply limits to the strategic benefits of corporate philanthropy?

2 comments:

  1. Great post and a great subject. This is almost like a litmus test for CSR. But what a difference a year makes! Compare the reaction between the launch of Goldman's 10,000 Women initiative two years ago, and this new initiative on which it is clearly based. The first programme was genuinely exciting in its ambition, scope and in the strategic fit with Goldman's core business. It made sense. Although this new initiative has the potential to create a new model of corporate philanthropy Goldman has its work cut out in persuading the world that this is not simply an attempt to patch up a dire situation it helped create.

    I'm not sure the motives do matter, and while I initially disagreed with your contention that PR is a legitimate motivation for CSR efforts, ultimately it doesn't matter if a programme is successful. It's unclear to me exactly who Goldman is trying to impress, if that is its motivation in launch this initiative. It repaid the bailout money very quickly and, unlike a consumer-driven company like Nike who managed to turn around a reputational disaster into a great example of CSR, doesn't need to engage the general public.

    The test for Goldman is going to be in its transparency about the progress of the 10,000 Small Businesses programme. If it is driven in large part by PR and the mitigation of reputational risk, then the company has to demonstrate an effective and long-term commitment to what it has started. This could be a transformative exercise in building a more equitable relationship between businesses in corporate America, with the potential to have a much wider impact on the economy. Given the size of the fund, and the attention it has attracted, if successful the programme could become a benchmark for CSR programmes. Let's hope it passes the test.

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  2. I accidentally posted two comments on your previous blog entry . . .

    - Vishal B.

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