Whether you work for a bank or a hedge fund, the war of words against Wall Street is a palpable threat to your career. That theme, which eFinancialCareers News has sounded since July 2008, emerges loud and clear from Goldman Sachs' explicit recognition that consequences from "negative publicity" can "adversely affect our businesses and results of operations."
The "Risk Factors" section in Goldman's recent 10-K filing includes this item:
We may be adversely affected by increased governmental and regulatory scrutiny or negative publicity.
.....The financial crisis and the current political and public sentiment regarding financial institutions has resulted in a significant amount of adverse press coverage, as well as adverse statements or charges by regulators or elected officials. Press coverage and other public statements that assert some form of wrongdoing, regardless of the factual basis for the assertions being made, often results in some type of investigation by regulators, legislators and law enforcement officials or in lawsuits. Responding to these investigations and lawsuits, regardless of the ultimate outcome of the proceeding, is time consuming and expensive and can divert ... senior management... Penalties and fines sought by regulatory authorities have increased substantially .... Adverse publicity, governmental scrutiny and legal and enforcement proceedings can also have a negative impact on our reputation and on the morale and performance of our employees, which could adversely affect our businesses and results of operations.
Appeasing Critics By Limiting Pay
That passage helps illuminate the thinking behind Goldman's recent strategic shift from confrontation to appeasement - particularly in setting pay for both executives and rank-and-file employees. On Main Street, compensation is the hottest among several hot-button issues that transformed the once-revered bank into what University of Delaware corporate governance expert Charles Elson has called "one giant pinata to whack."
Followers of eFC News received advance warning in words that closely foreshadowed Goldman's actual disclosure. Last Dec. 31, I wrote:
As much as I admire Goldman Sachs, it's getting harder to stomach the disconnect between the bank's financial performance and the unrelenting bashing it's taking in the media. Just as with credit spreads, a firm's image can deteriorate to the point where perception overwrites facts - fundamentally altering the reality on the ground. While we doubt the write-down of Goldman's reputational assets will materially damage its business or the career prospects of its work force, the risk is there. And it's the CEO's responsibility.
Three weeks later, Goldman reported company-wide employee compensation of $16 billion for all of 2009. At 35.8 percent of revenue, the ratio was smaller than the lowest analyst's forecast. "We hear what regulators and the world is saying," CFO David Viniar explained.
Then on Feb. 5, Goldman said CEO Lloyd Blankfein and four other top executives would each receive $9 million in stock as their bonus for 2009. The Wall Street Journal's Michael Corkery labeled Blankfein's smaller-than-expected payout "PR Genius."
Impact on Banking and Hedge Fund Professionals
How can your employer's reputation affect your career? Bulge-bracket banks' inclination to invest in human capital over the next two years will hinge on the outcome of the propaganda war being waged against them by pundits, politicians and consumers demanding to see a high-profile target punished for the recession. Having lowered compensation ratios across the board for political reasons, managements will wait to see if their most important adversaries are mollified. If not, then pay structures and amounts could tilt further against employees into 2011. Even now, institutions are "leveling" differences among compensation packages, says Options Group Partner Paul DeLucia - thus making it tough for anyone but a star rainmaker to boost pay by switching employers.
Are you safe if you work for a hedge fund? Hardly. They too face costly legal and regulatory consequences from a string of media allegations that read like a Saturday Night Live skit. Even before the current bogus "scandal" stories erupted about hedge fund leaders conspiring over dinner to corner the $1 trillion-a-day euro market, fund firms and their employees already faced higher taxes and stepped-up disclosure, registration and other requirements.
Reputational risk has always existed. But Elson can't recall any other company citing bad publicity as a risk to its business as Goldman Sachs just did. "It's reflective of the rather bizarre political climate in which we operate," he told The Wall Street Journal.
Another bizarre aspect: Goldman's reputation dived fastest just when the bank was regaining financial vigor ahead of most rivals. It's hard to avoid the conclusion there's envy at work.