Goldman Sachs (GS) Highlights The Risk of Bad Press On its Operations

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March 2, 2010 9:53 AM EST

Goldman Sachs' (NYSE: GS) new 10-K filing put into writing something that investors have already known and been worried about --- bad publicity is a major risk for the company.

As pointed out by footnoted.org's Michelle Leder, Goldman Sachs' latest annual report includes a new risk factor related to issues of negative publicity.

In the filing, Goldman warned:

"We may be adversely affected by increased governmental and regulatory scrutiny or negative publicity.

"Governmental scrutiny from regulators, legislative bodies and law enforcement agencies with respect to matters relating to compensation, our business practices, our past actions and other matters has increased dramatically in the past several years. 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 the time and effort of our senior management from our business. Penalties and fines sought by regulatory authorities have increased substantially over the last several years, and certain regulators have been more likely in recent years to commence enforcement actions or to advance or support legislation targeted at the financial services industry. 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.

Investors have clearly already been worried about negative publicity and its affect on the stock price. Many investors contend it is the major reason the stock is trading nearly $40 below its 52-week high and at a low multiple of 8.5x 2010 EPS consensus of $18.52 and 7.6x the 2011 EPS consensus of $20.55.

Goldman Sachs investors know that something must be done about the bad press, but according to Fox Business News' Charlie Gasparino, the company has "yet to formulate a coherent media strategy to deal with the growing public anger over its huge bonus pool and, most recently, the fallout over its role in helping Greece hide its massive debt."

Gasparino said some Goldman executives are calling for CEO/Chairman Lloyd Blankfein to relinquish his role as chairman so a more media-savvy executive can become the public face of the firm. Goldman spokesman Lucas Van Praag said there is no such effort underway to split Blankfein's role.

What Goldman Sachs does about this bad publicity will likely be a major factor on where the stock goes from here.

One obvious way the bad press would go away is if the economy and the unemployment situation improves significantly. But now matter how powerful Goldman is, they cannot control the direction of the economy. Goldman's management needs to focus on things that are in their control. Employee compensation is one of the factors leading to the negative press that Goldman Sachs has direct control over. Goldman may need to look at creative ways to pay employees so it can portray itself in a better light. Some ideas could include more stock-based compensation for employees, a special fund to help unemployed workers, or a massive hiring announcement of low-to-mid level employees.

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