Communicating (or not) big profits in recession

“The Joy of Sachs” article from Paul Krugman in yesterday’s New York Times drives home the unpleasant truth: “Goldman is very good at what it does. Unfortunately, what it does is bad for America.” Goldman Sachs has been in the crosshairs of many journalists and commentators since announcing its unbelievable second-quarter earnings of $2.7 billion, up 36 percent from the first quarter.

It may not be easy to work for Corporate Communications at Goldman Sachs these days, having to position such profit and “the biggest bonus payouts in the firm’s 140-year history after a spectacular first half of the year…” (Guardian) With more than 33 million Americans on food stamps, up 1.2 million in just two months, no spin is going to ameliorate the impact of staggering profit and enormous bonuses.

Back in December 2006, Goldman Sachs’ CEO, Lloyd Blankfein, sent the following message to everyone in the bank when the bonuses were coming through, according to the London Times: “Don’t be ‘irrational or arrogant’, he warned.”  We don’t know if Mr. Blankfein left a voice mail for his employees last week. According to Bloomberg, the only indication about how the company intends to conduct itself came from its CFO. “Our model really never changed,” Goldman Sachs Chief Financial Officer David Viniar said in an interview. “We’ve said very consistently that our business model remained the same.” And here’s the rub: if the business model has remained the same, and your profits are up, you’d better pay attention with what you do with money.

There were serious warning signs about the public’s perceptions about corporations months ago. When Richard Edelman presented his Edelman Trust Barometer 2009 – Paradise Lost at the Davos Forum back in late January, he said this: “Trust in business has collapsed in the United States, with American attitudes toward the private sector now comparable to France and Germany, which are historically the lowest among all nations surveyed.”

The Edelman report suggests how corporations should conduct themselves in these demanding times: “We have moved from a shareholder to a stakeholder world and to meet its challenges, business must change its approach to policy and communications. You have heard my appeal to the corporate sector for Public Engagement. At Edelman we’ve witnessed its effectiveness through private sector diplomacy, in which business works in cooperation with NGOs and government to address major global issues; through mutual responsibility, a combination of cause-related marketing and corporate social responsibility; through shared sacrifice in the face of the global recession, not just in equitable compensation, but also in supply chain management; and continuous conversation with stakeholders, one characterized by agility, timeliness, and contribution—not control.”  Back in January, Mr. Edelman was “optimistic that business has the ability to adapt to this new environment.”  I don’t know how Mr. Edelman feels today, but sadly, the situation got worse.

You know it’s getting unpleasant when the Wall Street Journal writes an editorial that openly chastises Goldman Sachs: “We like profits as much as the next capitalist. But when those profits are supported by government guarantees or insured deposits, taxpayers have a special interest in how the companies conduct their business. Ideally we would shed those implicit guarantees altogether, along with the very notion of too big to fail.”  Diane Frances, a journalist at the Financial Post, a conservative Canadian daily, takes it even further in her blog: “This week the headline should have read: ‘Goldman Sacks America’s Taxpayers’ instead of Goldman Sachs posts a US$3.88-billion quarterly profit.”

So how do you successfully communicate big profits during a deep recession? Forget it. There is no way to spin this one.

In Denial

Reading Frank Rich in the New York Times is my Sunday morning treat.   His opinion piece last Sunday was about cultural patterns of denial, arguing that we fool ourselves into refusing to face reality unless we hear warning signs over and over to accept “the wolf is actually at the door.”  These denials, of course, are not exclusive to the economy.  Mr. Rich states “Denial won’t fix the economy anymore than it won the war in Iraq.”

I’m afraid that our PR industry is gripped by the same impulse of denial as people  show about today’s economy.  The industry had it so good for so long, it’s hard for practitioners to imagine what is going to happen to PR budgets if the current recession becomes depression.  And that shouldn’t come as a surprise.  Some people still fondly recall those unforgettable messages on tech PR agencies’ answering machines: “Please only leave a message if your current or planned budget is over $40,000 per month…” In the late 90s, the fattest tech agency cash cows were quickly eaten by huge communications conglomerates and expected to generate the same revenue and margins year in and year out.  Actually, it was more like quarter after quarter, because now they had to meet Wall Street’s expectations in addition to satisfying clients.  This new blend of the street’s needs and clients’ needs may turn out to be about as toxic as derivatives and other instruments of mass destruction were to the financial sector.

While the PR industry seemed to have survived the tech bubble, I’m not sure that its habits and expectations changed that much.  Remember the key prerequisite needed to join a tech PR firm in the 90s?  Enthusiasm.  It sounds like a Reganesque requirement, but it all came from California where, to this day, its governor’s favored word is fantastic. The whole tech bubble era had a fantastic, out-of-the-world experience.

A lot is going to change if this economy gets worse. Today, survival is the common denominator behind every budget item review for every business.  Yet, the Publicis Groupe stated that “despite the ‘many challenges’ ahead, it remains ‘confident’ because of its ‘solid’ balance sheet and ‘flexible organization’,” according to MarketingWeek.  It reported a 1.1% drop in full-year net profit and predicted a “very difficult” 2009.  I’m not picking on Publicis, as other media holding companies have issued similar warnings.

Perhaps what the PR industry needs is the equivalent of Dr. Roubini, also known as Dr. Doom. We need an ice-cold analysis of where our industry came from, where we are, and where we’re going.  Right now, I’m afraid, we’re in a state of denial.  Let me know your thoughts.

Reputation and the Bottom Line

Stephan Stern wrote an excellent article in the Financial Times last week, provocatively headlined “The deadliest greenhouse gas? The hot air of CSR.” He noted that there “may have been much talk of (newly rediscovered) responsibility in Davos… But for most managers the biggest responsibility of all will always be to make a profit and stay in business.”

Staying in business, making profit and building, or rebuilding, your company’s reputation need not be mutually exclusive. In fact, companies now have an opportunity to reset many communication practices from the recent age of excess. That would mean tearing down a few Potemkin villages, including old CSR objectives. Let’s face it: does anybody really believe that last year’s CSR reports from big oil companies and recently socialized banks are doing anything for their reputation today?

Edelman got the ball rolling with its 10th Edelman Trust Barometer, confirming what people had already suspected: the reputations of most companies have plummeted. I read the agency’s recommendation – four pillars of “public engagement” – in Richard Edelman’s article published in the opinion section of the Financial Times. I hope the agency can simplify them a bit more. Perhaps we can take a clue from the survey, which mentions three top prerequisites for a company to regain the trust of its customers and prospects: offer quality products or services, treat employees well, and communicate frequently and honestly about the way the company does business.

So the new CSR should contain two accomplishments to achieve stellar corporate reputation in the new economic normal:  saving and creating jobs.  Without that, there won’t be any money left to save anything else.