Goldman Sachs’ Risk: The Press Hates Us!

If you were Goldman Sachs CEO Lloyd Blankfein, what would you be doing right now?

No, this is not a personal question, though you might enjoy speculating about how you’d spend the $53.4 million bonus that Blankfein earned in 2006. This is a business question: how would you spend your time?

Considering the overwhelming levels of instability and volatility that percolate throughout the world of global finance, you would probably spend a lot of time worrying about risk. But what type of risk would you focus on?

The risk that Goldman’s investment portfolio might (once again) plummet in value? Or that a critically important external party doing business with Goldman, like AIG, might (again) collapse? Or that the global economy might lurch into a double dip recession and drive up losses?

All of these risks are undoubtedly high on Blankfein’s list, but Goldman surprised the financial world last week by publicly acknowledging a different concern. Namely, they proclaimed that bad publicity represents one of the most significant critical risk factors they confront today.

A Long History

In a sense, Goldman’s pronouncement about bad press places them squarely within in a longstanding tradition of blame the messenger, a game that numerous people and organizations have played over decades of mass media coverage. For instance, General Motors spent years complaining that the press refused to cover news about their improving product lines, even as they blindly fell through their fiscal black hole towards bankruptcy. And President Richard Nixon once bitterly proclaimed that the press “won’t have Nixon to kick around any more” after he lost the 1962 election for Governor of California.

Nevertheless, public relations specialists have long (and accurately) noted that mass media strategies are often highly effective mechanisms for managing risk. Nixon himself once sidestepped calls for his resignation from the Vice Presidency of the United States by making a national televised speech about Checkers, his family’s pet dog. And firms like McDonald’s have skyrocketed to global dominance on the strength of mass media campaigns that feature McDonaldLand characters like Ronald McDonald, Mayor McCheese, and the Hamburglar.

So it’s no surprise that a global firm like Goldman Sachs, one that epitomizes the type of aggressive Wall Street investment house that made billions of dollars on risky trades and then received billions more in government bailout funds, would worry about bad publicity. But why would they publicly acknowledge their concerns about such a risk?

Going Public

Goldman’s decision to “go public” in a media sense with their concerns about poor publicity can actually be traced back to its 1999 decision to “go public” in an ownership sense. It was then, at the peak of the Clinton era bubble in technology and finance, that the private partnership of Goldman Sachs decided to launch an Initial Public Offering of its shares to public investors.

At the time, that decision was perceived as a brilliant feat of financial timing and engineering, considering that Goldman received top dollar for the sale of its own stock near the peak of a stock market bubble. But by becoming a publicly traded firm, Goldman voluntarily agreed to accept a wide range of disclosure requirements that are imposed by the U.S. Securities and Exchange Commission on all public corporations.

One particular disclosure requirement involves the need for publicly traded firms to issue periodic financial statements to the public, accompanied by a retrospective management discussion and analysis of historical trends and a prospective assessment of significant risk factors. As a public company, Goldman was required to file its annual report (known as a Form 10-K) last week, and thus was compelled to disclose the risk of bad press in the section that contained their assessment of risk factors.

The COSO Cube

Of course, the simple disclosure of a risk in a Form 10-K does not necessarily shed insight about why a firm is compelled to disclose it in the first place. In other words, firms are not necessarily required to reveal their internal risk management deliberations, nor to describe how they reached a decision to “go public” with certain concerns by adding specific issues to their disclosures of significant risk factors.

To glean some insight into how such decisions are made, it is necessary to understand the integrated framework of Enterprise Risk Management that has been developed by the American accounting profession. COSO, a consortium of five major accounting trade organizations, has developed a three dimensional cube that describes this decision making process.

The process doesn’t contain any surprises. It simply emphasizes the need to understand one’s internal environment and business objectives before identifying specific risk factors, and then to prioritize and focus on factors that cannot be addressed easily through crisis prevention or response activities.

Thus, Goldman must now believe that its internal people and priorities will inevitably continue to place them at risk of incurring public enmity; they must also believe that there is relatively little that they can do to prevent or address such events. In other words, Blankfein himself must be looking forward to many more days of bad publicity in the future.