Challenges for Goldman Sachs, Case Study Example

I have been assigned the task of reviewing certain ethical problems and recommendation for action at Goldman Sachs. What follows is an analysis of the problem and justifications for the interpretation as well as suggested protocols for negotiation the situation and justifications for those solutions.

Analysis and Justification

The investment banking industry has been experiencing pay problems long before the current economic crisis. Although much of the crisis can be accounted for in cyclical economic behavior, it seems the public, media, and government have focused on the indiscretions of the industry and performance pay policies, instead of trying to understand the intricacies of interrelationships of the industry to the global economy. In fact, the industry itself does not constitute that large of a portion of the GDP, but the cascading impact of its unique position in the economy extends it effect on the market.

Letting it be understood that this is as much as a public relations issue as it is an ethical dilemma; Goldman Sachs owes $125 million in contracts to some of its highest performing employees. To pay this out could have a negative affect on the public perception based on the prevailing understanding of the global economic crisis, its impact on the American economy, and the portion of the responsibility shared by the investment banking industry. As part of the AIG bailout, Goldman Sachs shared in the credit a trading partner with AIG. Furthermore, the government had also submitted a $10 billion bailout directly to Goldman Sachs. Although AIG has taken the brunt of the responsibility for their role in the crisis because of risky financial manipulation in the housing insurance market, the entire industry is on trial. Nevertheless, the government saw TARP as necessary.

The media has successfully pigeon-holed the whole problem into bonus pay policies in the financial service sector. They have presented such compensation as a get rich quick scheme. To be fair, the industry had already implemented certain limits on these practices – for example, paying bonuses in stock options with the stipulation that the stock could not be sold in the short run. What this did was prevent executives from acting based on total self-interest. If they could just take the money and run, there would have been little motivation in the financial health of their company. The government jumped on the band wagon with Fraud Enforcement and Recovery Act. Although some heavy weight financiers had violation certain ethical rules of conduct, legal requirements, and professional guidelines, Goldman Sachs herself was not really part and parcel to it. Still, she is still baring a good part of the blame, and as the government and media go head hunting, Goldman Sachs had to step up to the plate too.

The reality is that although Goldman Sachs has shared in TARP, it did so only because it had also fell victim to unstable accounting practices, the economic downturn, and the rest of the global crisis as we know it. To be fair, it should be noted that Goldman Sachs has sufficiently fulfilled the ethical requirements to zero the TARP credit, restructure investment practices, and mitigate the impact of bonus pay schemas as it existed. The fact is the Goldman Sachs did well at the head of the downturn because their brokers effectively traded through stock market lows.

That was not quit enough of an answer to industry outsiders. They wanted to attribute the success to some sordid causal factor. Some complained that their sheer economic power of Goldman Sachs made it strong enough through low points to be able to absorb a good part of the risk created by the downturn. They complained that smaller companies could not compete effectively to capitalize on some of these opportunities which hindered economic growth which accelerated the downturn. Basic business understanding would tell them two important points:

1. A company’s ability to successfully negotiate risk is the basis of the free-market system – the higher the risk, the greater the potential profit.
2. Had it not been for certain powerhouses processing some of market instability that shored up the risk, the downturn could have been much more drastic.

Still, neither the industry itself nor Goldman Sachs is necessarily blameless. Furthermore, neither is completely blameworthy. The future actions of each should reflect the correction of specific mistakes that negatively impacted the economy as a whole. The government has seen fit to hold certain individuals accountable for this behavior, but the rest of us should work toward long-term solutions in the interim. One of those solutions includes recruiting and maintaining the most proficient minds with respect to investment banking. This is a duty not only to shareholders but also to the economy at large. What follows are recommendations and justifications about how to proceed with Goldman Sach’s $125 million payment contracts.

Recommendations and Justification

As noted the industry as a whole should focus on long-term growth. It is clear that part of the problem has been the short-term gain mentality that is produced with bonus compensation packages as they had been. The message is: “If you make us lots of money, we will pay you lots of money.” Without stipulations, this motivates a business person to cut corners and take perhaps unnecessary risks.

Although the question of the $125 million is actually sort of marginal when couched in the bigger economic picture, it should be handled fairly. The people who worked for that money should be paid. It is that simply both ethically and legally. The contracts were not illegal at the time they were drafted and signed. So, there is no wrong doing there, and the contractors had presumably not worked illegally or unethically to earned the bonuses. So, they should be paid. It is really that simple.

The complexity arises when we begin to look at the public backlash that might ensue as a result of the publication of the payment of these compensation packages. As part of a more proactive stance toward global economic health, it is incumbent upon Goldman Sachs to each in such a way that builds trust between the financial sector and the public. To act hoi polloi here would make matters worse for everyone if it continues to damage the image of the industry in the mind of the people.

The strategy set forth here is done so with the most ethical business intentions. In terms of the ethical portion, it aims to do what is right without negatively impacting the economy. In terms of the business portion, it seeks to turn a threat into an opportunity. In this way, Goldman Sachs is able to not only save face and do what is right in the eyes of the company; it also may help the public better understand what has happen and what would happen with respect to the economic downturn. With the press release about the payment of the $125 million compensation packages, Goldman could take what might have been a fiasco and turn it into a success.

What this really amounts to is beating the media and government to the punch. By implementing proactive and innovative solutions to the traditional problems that were the core of the downturn that caused the crisis, Goldman Sachs prevents government overregulation and provides an opportunity to explain to the public and media the actual role the financial industry played (and no more), the role Goldman Sachs itself played, and what changes have been made to prevent similar future events.

One of the main things the people will want to know is how much is going to be paid to individuals. To them, it appears that so much profit has accumulated in the financial sector that it causes everyone else to starve for profit. Say, the $125 million in compensations is paid to 2000 people. Being that the bulk of compensation comes from bonuses which amount to about the profit margin of an average small business owner per person. To be fair, it should be noted that those under such contacts are in effect free agents. They are independent business people until they are contracted.

As part of the press release, it should be noted that along with the payment of this legitimately due compensation more moderate compensation protocols are being put in place, namely those that reward behaviors that promote moderate and long term growth while drastically reducing compensation for short-term focus behaviors. This mitigates the impetus to cut corners and take unnecessary risks. It should also be noted that Goldman Sachs in paying back TARP funds with interest which nets the government money and helps stabilize the economy. Furthermore, it should be mentioned how Goldman Sachs is reducing dependence on borrowed money as a whole and is encouraging its peers to do the same as it has with clearing weak assets. In conclusion, the press release should make the connection between these factors and how they even they playing field for job growth among its competitors.

These actions indicate a business approach to an ethical dilemma. Goldman Sachs only takes responsibility for what it has done wrong, sticks to its agreements, approaches the future proactively, and provides leadership in the marketplace. Neither, the industry nor the government nor the public could ask for more. This is the most pragmatic solution to be presently formulated.