Goldman’s “Social License”

How the firm has endangered its most valuable intangible asset.

Lloyd Blankfein 

It’s been a bad week or two for Goldman Sachs. On April 16, the Securities and Exchange Commission charged the firm with fraud for the way it structured and sold some junky mortgage-related products. Earlier this week, its top executives came off as responsibility-evading jerks when testifying before Congress. And then on Thursday, the Wall Street Journal reported that the SEC had referred Goldman’s case to the Justice Department.

I’d argue that Goldman is entering dangerous territory. The firm is in danger of losing what may be its most valuable asset: its social license.

Social license is a vague term that you see bandied about more and more in the corporate world. It’s something like reputation. Social license describes how a company plays with others and how it responds to problems. If a company has social license, it behaves in such a way that other businesses and institutions want to do business with it, and governments are more likely to give it permission to operate. For example, it looks like British Petroleum, which has followed up a disastrous refinery explosion with a disastrous oil spill in the Gulf of Mexico, is in the process of squandering its social license to operate in the United States. The same holds for Massey Energy.

As a general rule, simply being charged with an offense—or even being convicted of an offense—doesn’t automatically suspend a company’s or an individual’s social license. Time, money, and persistent effort can rehabilitate even the most damaged reputations. Two decades ago, deal-maker Michael Milken was convicted and jailed for insider trading. Since his release, Milken reinvented himself as a philanthropist, policy entrepreneur, and advocate for prostate cancer research. He founded the Milken Institute, which publishes a journal I’ve written for several times and which holds a well-attended conference every year.

It’s harder for corporations to rehabilitate themselves. Depending on what line of business a corporation is in, an indictment can be a kind of death sentence for it. Once the accounting firm Arthur Andersen was convicted in June 2002 for its role in the Enron debacle, it was finished. Nobody wants to do business with a public accounting firm that’s been busted for document destruction. Andersen’s conviction was ultimately overturned by the Supreme Court in 2005—long after the firm went out of business.

Goldman CEO Lloyd Blankfein and his colleagues don’t seem to get this question of social license. Courts of law may ultimately vindicate the firm, but it could be irreparably damaged by evidence and public outrage anyway. During their recent congressional testimony, Goldman executives took pains to note that Goldman wasn’t acting as an adviser when it peddled those crappy CDOs to the unfortunate German banks. It was simply making a market in securities, finding people who wanted to sell them and people who wanted to buy them. Customers should have no reasonable expectation that Goldman isn’t selling them junk, they argued.

That may technically be true for market-making or trading operations, but that’s not all Goldman does. Goldman makes most of its revenues from trading on its own accounts, but it made its name, and established its brand, in investment banking and asset management, two businesses that depend almost entirely on customers thinking they are getting good advice and treatment.

While investment banking and asset management are now effectively rump businesses, they’re still critical to Goldman’s reputation. As this list of services shows, Goldman has a private wealth arm, which manages money for rich people, and a mutual funds business open to individuals. Its investment bankers provide advice to governments (England, Greece, et al.) and corporations, and help underwrite the debt and securities offerings of companies and governments. In fact, Goldman does a lot of government business. As Lloyd Blankfein told Sen. Grassley, Goldman has served as an underwriter on $34 billion in Build America Bonds, collecting $54 million in fees. “In total, Goldman helped municipal entities issue $154 billion in bonds since the beginning of 2009.” (Here’s more about Goldman’s municipal bonds business.) As the Newark Star-Ledger noted, “Goldman Sachs was the fifth-largest senior underwriter of municipal debt last year, handling about $34 billion, according to data compiled by Thomson Reuters.”

On the trading floor, nobody really cares how you dress, whether you use silverware, how much you curse, and how you behave. So long as your trades clear, nobody in the marketplace will shun you. But in these other businesses, you need social license to operate. Endowments, universities, institutions, and governments don’t want to be seen doing business with rogue operators. Goldman’s behavior puts public officials who patronize it in the awkward position of continuing to funnel business to a controversial firm that is also a significant campaign donor. Some states have reaffirmed their support for Goldman in light of the SEC filing. But an indictment and/or conviction might be another story.

Despite the firm’s long tradition of sending senior executives to top government posts, there’s plenty of evidence that Goldman’s current regime, which is dominated by traders, doesn’t really care much about its social license or how the actions of the traders might affect the ability of investment bankers and asset managers to win business.

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