November 23, 2009

Update - Goldman's $500 Million Controversy

There were quite a few articles over the weekend that addressed Goldman Sachs' 10,000 Small Businesses program and the backlash that it has induced. Below, I've summarized a few that I found particularly interesting.

Before we turn to the articles, though, I want to point out one thing. I noticed an important line in a Financial Times article, which said, "Goldman stressed that the small business drive had been planned for a year." I'm not sure if or how that changes the discussion of whether this is a good strategic CSR initiative, but it's a useful piece of information to add into the conversation.

$500 Million is just "Crumbs from its (Goldman's) table."
The New York Times published an editorial entitled "Goldman's Non-Apology". The editorial criticizes what it argues are Goldman's contributions to causing the current recession, as well as what it sees as Goldman's unwillingness to acknowledge that it needed the government's bail-out money and that it thus isn't true that "taxpayer dollars have not helped to generate its post-crash profits." The piece goes on to address the 10,000 Small Businesses program, calling the $500 million pledge "crumbs from its table". It says, "It is hard to take seriously Goldman's claim that the program was not motivated by its public relations problems. The money will be welcomed by the recipients, but if Goldman wants to make a meaningful contribution, it would have to be in the billions and aimed more directly at taxpayers." Instead, the editorial suggests, Goldman should make "A multibillion-dollar gift to the federal Bureau of the Public Debt, which accepts tax-deductible donations to reduce the national debt."

Goldman's recent "exercise is so sequenced and packaged that it's bound to come across as disingenuous", but ultimately, the company "exists solely to make profits for its employees and shareholders."
The Wall Street Journal blog Mean Street, written by Evan Newmark, takes a very different stance, in a post entitled "Mean Street: Don't Apologize for Anything, Goldman Sachs". According to Newmark, the reason the general public is angry at Goldman is simple: "In an economy full of losers, everyone is fixated on hating the winner." He goes on to argue that the 10,000 Small Businesses initiative, along with Lloyd Blankfien's apology (quoted in the NYTimes editorial, if you want to see the exact language), " so sequenced and packaged that it's bound to come across as disingenuous, even deeply cynical." However, ultimately, Newman thinks that the public is coming down too hard on Goldman: "And here's the really unfortunate aspect of your current predicament: it's undeserved. Sure, there was some clumsy PR out of Goldman over the past year. But I still can't figure out why and to whom you're apologizing." Furthermore, he says, "'re apologizing because nobody can handle the real truth: Goldman Sachs exists solely to make profits for its employees and shareholders. The rest is just PR."

"The bankers may have to give up more yet - and not only by writing a check."
A separate article New York Times article - "Wall Street's Spin Game," by Graham Bowley - gives Goldman Sachs advice on how to confront its current public relations challenges (which go beyond the Small Businesses initiative). Among the tactics he recommends is, "Give Back Some Money." However, he warns, "...there is the risk that such a strategy will be seen as a transparent ploy to buy off public opinion. Goldman's donation was only about 3 percent of the $16.7 billion the bank has so far set aside this year for its bonus pool. The bankers may have to give up more yet — and not only by writing a check." Instead, he advises (quoting Howard J. Rubenstein, president of communications firm Rubenstein Associates), the company should make it "mandatory" for its "brilliant staff" to volunteer in ways that have "real impact". (It's not particularly relevant here, but I really liked the advice to "Show you create real products that benefit people." Actually, that is relevant - ultimately, isn't CSR broadly about creating real value for the general public, that is, creating products (or services, or donations, or business processes) that benefit people?)

"As hedging strategies go, this remains far from sure to work."
The Financial Times suggests looking past the immediate controversy and into the future, with an article by Gillian Tett entitled, "Can today's philanthropy fend off future bank-bashing?" The article asks, "What exactly was going through the brain of Lloyd Blankfein, head of Goldman Sachs, this week when the bank announced a $500m initiative to help small American businesses?" Tett argues that, while making "an effort to quell the current bank-bashing" might be part of the company's reasoning, "Goldman, is (in)famous for trying to be ahead of the curve. And the really interesting political economy issue that haunts finance now, is not the attacks that Goldman (and other banks) have suffered in 2009 - but the question of what could await them in 2010, 2011, 2012 or beyond." The article suggests that, if the economic situation gets worse instead of better, we could see far greater public outrage. In this context, "Can Goldman's $500m programme protect the bank against that political risk? On paper, the target of its largesse certainly looks politically savvy: small business funding is a huge political headache in the US right now, due to its link with unemployment." However, Tett goes on to say, "...the grim fact remains that $500m is still just 3 per cent of the bank's bonus pool - and even a non-banker can see that is a small sum. As hedging strategies go, this remains far from sure to work."

"Goldman's wholesale focus…does not suit retail diplomacy."
A second Financial Times article, while focusing on the various problems threatening Goldman's reputation (its "most precious asset"), raises a very interesting question about its philanthropic efforts: "One difficulty is that Goldman's wholesale focus means little business contact with an angry public – it does not suit retail diplomacy. Even well-designed charitable initiatives, then, risk being misinterpreted." The article doesn't elaborate much on this idea, so I'm not completely sure where the authors are going with it, but I think this is a really interesting comment. It's true that the vast majority of people don't really know what Goldman Sachs does, not in the way that we know what, say, Wal-Mart, or Disney, or Bank of America do. (This relates to the advice in the NYTimes article referenced above, "Wall Street's Spin Game".) We interact with the latter companies' products and services every day, but hardly any of us interact with Goldman. As such, is it possible for the general public to have a relationship with the company, and is such a relationship critical to our ability to trust them? This is important because, as I discussed in my last post about Goldman Sachs, while CSR initiatives may build trust, they need to be built on a baseline of pre-existing trust, or people might not trust the activities or might see them as disingenuous. So, what does this mean for business-to-business companies? Are there other ways they can create that baseline of trust, or, as this FT article suggests, are they simply not suited for "retail diplomacy"?

I'm interested in looking at other instances in which a corporate philanthropy commitment has been met at least in part with negative feedback - I think isolating what doesn't work would help us to better understand what does. If you know of any good examples, I'd really appreciate hearing them.


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