Goldman Beats Profit Expectations, Some Investors Still Not Happy

Goldman Sachs released its earnings today for the third quarter and even though it far outpaced expectations, not every shareholder is happy with the company.

The company announced a net income of $3.2 billion, or $5.25 per share, for the three months ending Sept. 25, handily beating analysts’ expectation of $4.18 to $4.24, according to reports. And it shattered the $845 million net income from the most similar quarter from last year ending Aug. 29, 2008. (The time periods are not aligned because Goldman changed its fiscal reporting periods last year.)

In its conference call, Dane Holmes, Goldman’s director of investor relations, said the firm’s strong financial performance was fueled by gains in trading and a “continued demand for expert advice and execution from a global client base.”

Holmes further said that Goldman’s asset management business saw a “re-risking” in the third quarter as clients sought more lucrative investments. He added that Goldman expects that trend to continue over the next several quarters.

While Goldman has been widely viewed as the best managed Wall Street firm through the financial meltdown, it has also become the poster child of corporate excess. And both of those personalities have been on display over the past two days.

In anticipation of the company’s earnings, socially responsible investor groups including the Nathan Cummings Foundation and the Benedictine Sisters of Mt. Angel filed shareholder resolutions yesterday with Goldman urging the company to “review pay disparity and analyze the appropriateness of its spiraling pay packages.”

Goldman, in its earnings report, said it paid a total of $16.7 billion in compensation and benefits for the first nine months this year, up 46% from the nine months ending August 29, 2008.

And the company is expected to end the year with $20 billion paid for executive bonuses, according to the Interfaith Center on Corporate Responsibility. The resolutions were filed to appear in the 2010 proxy statement and be voted on in the annual shareholder meeting.

A spokesman for the groups could not be reached by press time, but in a release, Laura Shaffer, director of shareholder activities of the Nathan Cummings Foundation, said: “This request is especially timely as Goldman Sachs rushes to pay huge bonuses, setting an example that many Wall Street firms will no doubt strive to emulate. As shareholders, the ripple effects of this extraordinary compensation are especially concerning.”

John Jay, a senior analyst at Aite Group, says that there is a distinct possibility that efforts like this can wind their way from grassroots activists to legislators and then to regulators, but it’s going to be a tough ride if the activists really want to enact changes. For one thing, he says, Goldman Sachs has paid back the TARP money it owed, which weakens the case of the activists. And even if that weren’t the case, any regulatory change on compensation would not be aimed just at Goldman. Rather, it would ultimately be an industry-wide change, which would be extremely difficult to pass legislatively.

But that’s not to say that the Goldman couldn’t make moves to help its own image. Jesse Derris, a crisis communications consultant at Sunshine Sachs & Associates, says that while the image issues do not pose an immediate business risk, they do constitute a definite PR problem. “They’re perceived a callous and indifferent by much of the country,” he says.

And Goldman can shrug its wealthy shoulders about that perception in the short term, but it should not take a haughty attitude in the long term, he cautions. Derris, who represents John Thain, who most recently departed the top spot at Merrill Lynch following its acquisition by Bank of America, in a cloud of controversy over the furnishing of his office. Derris says that Wal-Mart can serve as an example as a callous giant who finally succumbed to populist outage. It’s a much different industry, but the broad lesson it offers is of a corporate giant that had a swagger for a long time. But eventually, it made substantive changes in the way it builds stores and even the products it sells because popular sentiment was so strong against its business practices.

And while Goldman has not made substantive changes yet, it could help itself by using the leadership position it enjoys in the industry. “They’re in a unique position because everyone looks up to them… they could make changes just in the way they talk about compensation.” For example, they could institute long vesting schedules with its stock compensations. And to be sure, Derris says, its senior management is mostly paid this way, but these image issues with compensation stem from the mid-level and lower employees that are often paid with a big wad of cash at the end of the year.

Goldman Sachs did not return requests for comment about the shareholder resolutions.
Source financial-planning.com