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Goldman Sachs: Reputation and Regulatory Risk Reputation resilience Goldman Sachs: reputation and regulatory risk processes that govern ethical behaviour, Goldman Sachs has been clear for innovation, quality, safety sustainability and many years that its reputation is a security. In accounting jargon, these key corporate asset. But recent business processes comprise the intangible assets that speak for 70% of the market events have shown that having such value of the average traded company. awareness is not always enough Reputation drives intangible asset value. Reputation-relevant intangible assets impact By Nir Kossovsky on corporate financials in several ways. By affecting customers, they impact on pricing The probability that a CEO will sit down to power and sales revenue. By affecting breakfast tomorrow morning and suffer employees and vendors, they impact on headline shock involving his or her operating costs. By affecting creditors, they company is significant. The Economist impact on the cost of debt capital. And by magazine reported recently that Oxford affecting equity investors, they impact on Metrica estimates that executives have an earnings multiples and equity value. 82% chance of facing a corporate disaster There’s more. Another group of external within any five-year period, up from 20% stakeholders impacted by reputation, whose two decades ago. More than ever, rather actions can have life-altering consequences than shaping the news, companies are for most companies, are the regulators. This playing catch-up. Companies have reached issue’s case study on risk and reputation the limits of corporate branding and are management looks at what happens when realising the weaknesses in traditional executives at an iconic firm admired for its marketing. This is why. innovation in the financial services sector, Brand, the embodiment of a corporate Goldman Sachs (NYSE:GS), experience a promise, is more transparent. NGOs, loss of regulator immunity as a consequence Facebook, Twitter and anyone with access of a tarnished reputation for ethics. to a keyboard and a blog can quickly scratch below the veneer of a brand to examine its The company authenticity. Substance really matters. And, The Goldman Sachs Group Inc (NYSE: GS) is therefore, there is now a growing an iconic investment banking firm that has convergence of formerly separate corporate been active in the capital markets sector of functions – including marketing, risk the financial services industry for more than management, compliance and IP 100 years. The company operates as a management – seeking a coherent holistic leading global investment banking and solution to the stakeholder’s perception of securities firm with two main divisions: brand. That perception is called reputation. Global Capital Markets, which includes Reputation is how the brand promise is investment banking, financial advisory received and valued by stakeholders such as services, trading and principal investments; customers, vendors, employees, lenders and and Asset Management and Securities investors. Reputation is a set of expectations Services, a business unit responsible for based on past experiences. Today, these investment advisory services. Goldman expectations are most significantly affected Sachs’s clients include corporations, by how a company manages the business financial institutions, governments and www.iam-magazine.com Intellectual Asset Management July/August 2010 19 Reputation resilience wealthy individuals. The company operates Last year, 42% of its 32,500 total staff were Table 1. Key Goldman Sachs financial over 40 offices across the globe. based outside the Americas and 44% of its performance indicators as of end of net revenues were generated outside of the 23rd April 2010 The first 100 years Americas. The company’s global reach is The company was founded by Marcus illustrated by the following: Market cap US$84.7 billion Goldman, a Bavarian school teacher who • It is a member of and an active (intraday) emigrated to the United States in 1848. participant in most of the world’s major Profit margin 30.97% After supporting himself for some years as stock, options and futures exchanges (ttm) a salesman in New Jersey, Goldman moved and marketplaces. Revenue US$48.52 billion to Philadelphia, where he operated a small • It is a primary dealer in many of the (ttm) clothing store. After the Civil War he largest government bond markets Qtrly revenue growth 35.5% moved to New York City, where in 1869 he around the world. (yoy) began trading in promissory notes. In the • It has interbank dealer status in Gross profit US$45.17 billion morning, Goldman would purchase currency markets around the world. (ttm) customers’ promissory notes from jewellers • It is a member of or has relationships Beta 1.43 on Maiden Lane in lower Manhattan and with major commodities exchanges from leather merchants in an area of the city worldwide. Data source: Yahoo Finance called The Swamp. Then, in the afternoon, • It owns commercial banking or deposit- Goldman visited commercial banks, where taking institutions organised or he sold the notes at a small profit. operating in the United States, the Goldman’s son-in-law, Samuel Sachs, United Kingdom, Ireland, Brazil, joined the business in 1882. The firm Switzerland, Germany, France, Russia expanded into a general partnership in 1885 and South Korea. as Goldman, Sachs & Co, when Goldman’s son Henry and son-in-law Ludwig Dreyfus Last, the company’s businesses are supported joined the group. Henry Goldman led the by a Global Investment Research division. firm in new directions by soliciting business As of December 2009, it provided research from a broader range of interests located in coverage of more than 3,000 companies Providence, Hartford, Boston and worldwide and over 45 national economies. Philadelphia. In 1887, Goldman, Sachs began a relationship with the British merchant bank The investment banking and capital Kleinwort Sons, which provided an entry into markets business international commercial finance, foreign- The industry provides investment banking, exchange services and currency arbitrage. For trading and investment management the next 100 years, the partnership expanded, services to corporations, financial business operations increased in complexity institutions, governments and high-net- and leveraged transactions demanded an worth individuals. The larger firms provide ever-larger balance sheet. a full suite; smaller firms tend to specialise in aspects of the value chain. IPO and the past decade Classical investment banking comprises In early May 1999, the company listed on debt and equity underwriting and the New York Stock Exchange, raising associated advisory services. Investment US$3.6 billion. In 2002, then CEO Henry banks help clients structure and issue Paulson, who would go on to be the US equity and debt securities to raise general Treasury Secretary under President George purpose capital, to finance merger and W Bush, laid out the company’s strategy acquisition opportunities, and to support declaring: “We want to be the premier company restructurings. As an underwriter, global investment bank, securities, and investment banks also help place securities investment management firm. We want to with investors. Thus, the classical have a disproportionate share of the investment bank plays an important role as business of the most important clients in a trusted intermediary for both buyers and the most important markets.” Businessweek sellers of securities, and because it relies on magazine memorialised those words adding: trust, it is relationship and reputation- “The company must gain a lock on driven. We’ll circle back on this shortly. providing financial advice to marquee A second area of activity is trading and corporations, government authorities, and principal investments. Investment banks superrich individuals in the world’s major will make markets and trade a full range of economies – the US, Germany, Britain, fixed income, currency, commodity Japan and China.” This appears to have instruments, equity securities and come to pass. derivatives, and will offer forms of capital As of 31st December 2009, Goldman market-based risk transfer such as insurance Sachs operated offices in over 30 countries. and reinsurance. They may also make 20 Intellectual Asset Management July/August 2010 www.iam-magazine.com Reputation resilience T`able 2. Risk and reputation management basics banks engage in significant amounts of market, company and geopolitical research. Management of these key business processes by fostering enterprise-wide conformance Some banks offer some of these research with institutional standards is a necessary condition for creating, preserving or restoring products as a fourth area of activity. reputation value There are significant synergies and potential conflicts among these areas of Create an ethical work Ethics are the moral principles by which a company activity. This is because all three positions environment operates; integrity is the act of adhering to those in any transaction are competitive. Sellers moral principles. Ethics are an integral part of governance that seek the highest price to maximise short- combine with integrity to affect the reputation value of all term profits; buyers seek the lowest price to other intangible assets. Additionally, ethics are the keystone maximise long-term profits; and intangible asset because they form the basis for trust intermediary market makers seek to and confidence. maximise arbitrage profits. Drive innovation Innovation
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