June 2, 2010
Dear Peter,
Enjoyed your May 2 column about
Goldman Sachs. The exchanges between you, Jody and Daniel made for a fun read. “How to talk about capitalism” (as you
eloquently put it) is one of the major challenges facing public relations, and
not one we’re dealing with very well. (By “public relations,” I mean the
discipline as first envisioned by Edward Bernays – an applied social science
that interprets corporations to the public and the public to corporations, with
the goal of making it easier for corporations to conduct business in ways that
benefit both sides – as opposed to the glad-handing, message-spinning,
milk-sopping variety for which the term “PR“is better known.) This is why I’ve
spent the better part of the last five years encouraging public relations
professionals to study and adopt the principles, fundamentals, methods and
attitudes found in risk communication.
The Goldman-Sachs situation provides
an excellent example of how risk communication could help a vilified company
navigate treacherous waters. The core problem (as I see it, anyways) is the
failure on the part of GS and its advisors to distinguish a true crisis from a mere
controversy. To help my PR peers
understand this distinction, I’ve started using the term “hot crisis” to
describe a true crisis and “cold crisis” to describe a mere controversy. In the
lexicon of risk communications, a hot crisis is a situation calling for crisis
communication (high hazard/high outrage) while a cold crisis is a situation
calling for outrage management (low hazard/high outrage).
Thus, the British Petroleum situation
is a “hot crisis.” The oil spill presents a true threat to life, health and
property. Don’t think there is any dispute about that. So BP should apply the
strategies of crisis communication.
But Goldman Sachs is experiencing a
“cold crisis.” At least, that’s my
interpretation, and it certainly is up for debate. I don’t believe that Goldman
Sachs’ deal presented a hazard to anyone other than those who willingly participated
in the deal. There are no victims here. Everyone involved placed a bet. Some
won, some lost.
It’s a bit like playing craps. Most folks put their money on the COME box,
betting with the shooter. Some contrarians (like me) believe that you are
better off putting your money on the DON”T COME box, betting against the
shooter. Which way you bet has no effect at all on the outcome of the roll, yet
it is amazing how many folks who bet on the COME will get angry with the folks
who bet on the DON’T COME. They will actually blame the contrarians when the
shooter craps out and the COME bettors lose their money to the house. We see
the same mentality when bullish investors get angry with the bearing investors,
as if the short sellers have any effect at all on whether a stock goes up or
down. Their outrage has nothing to do with the actual hazard, which of course is
the underlying point of your work.
The tricky part for GS is this:
Congress and the White House are looking for a scapegoat on which to blame the
sub-prime housing debacle. They are diverting the public’s attention from the cause
(a federal policy from the 1990s to force lenders to create mortgages for folks
who can’t afford them) to the side effects (a market for instruments designed
to mitigate the risk of subprime loans, and a betting pool to wager on whether
the subprime market would continue to boom or collapse). Certainly the U.S. investment class has grown
both in size and knowledge thanks to mutual funds, 401Ks, IRAs, the Internet
and Investor’s Business Daily. A significant portion of that class understands
that markets are made to trade equities and bonds, and that some folks on Wall
Street are bullish on the future of those markets and others are bearish. What
far fewer people understand is this: Markets are also made for side bets on the
performance of stocks, bonds and other instruments. There are plenty of books
for the average investor to study on buying stocks, buying bonds and buying
mutual funds. There are very, very few on how to play the short game, or on the
role of hedge funds, or the inner workings of the derivative markets, or on the
distinctions between investing and speculating. So it’s relatively easy for
politicians to direct public outrage toward these less-understood facets of
Wall Street because they are exotic, seemingly unknowable, controlled by others,
and somehow more artificial than stocks and bonds. Add in the penchant for the
public to view Wall Street as the last Robber Barons – immoral, untrustworthy
and unresponsive to Main Street – plus the nation’s historical discomfort with financial
speculation, and you have a potent formula for misdirected outrage. (In other
words, I’m picking No. 5 from your list of options.)
Now all of that is, for the most
part, a technical argument. Goldman Sachs gets nowhere in this situation by
describing and defending the perceived “hazard” for which it is blamed. The
only effective strategy is management. Acknowledge the outrage. Do your best to
empathize with anyone who believes they’ve been wronged. Wear the hair
shirt. Sit with your legs in the stocks.
Act humbly and contritely. Accept as much blame as you can without destroying
your brand or accepting undeserved liability. Do whatever you can to calm
people down. Only then, when the glare of the public has moved on to the next
outrage, can you effectively negotiate your position with the regulators and
lawmakers.
Lawyers hate that answer; they would
rather go into siege mode and wait for the storm to pass. Problem is, while that
may be an effective way to control liability, it stinks when it comes to managing
culpability. It is possible to fight all the way to the Supreme Court, win the
case, and still lose your company. Arthur Andersen learned that the hard way.
Executives also hate that answer;
they want to get tough. Ramp up the testosterone. Play hardball. I ran into this so often during my agency
days that I learned to paint a vivid picture for the CEOs on how “going to war”
would most likely play out. I forced them to consider the blood and treasure
required to wage a war with the media, with regulators, with politicians and
with the public. Once they really considered the resources required to fight
back, they usually calmed down and sought another solution. My question to them
was always, “Are you in business to make war or make money?” Well, obviously,
to make money. Then let’s focus on doing whatever we have to do to calm anyone
and everyone who is angry with you. Let’s wage peace. And once we have peace,
we can focus on recovery. You will save
a ton of money, and if you play this right you can come out of it with a better
reputation than you had before this whole thing began. In the end, the CEOs almost always walked a
line between siege (to keep the lawyers happy) and outrage management (to get
out of the jam with whatever public was outraged).
That would be my advice to Goldman
Sachs: Treat this as a cold crisis. Focus on managing the outrage for now. Work
out the details for protecting and advancing your interests later. Until you
are out of the spotlight, you are at the mercy of the media and the
politicians. And the longer you stay in that glare, the greater the damage to
your brand. So do whatever it takes to get out of that glare. The big question:
Is it possible for a “culture of arrogance” to understand it can be destroyed
by public outrage and to make the transition to abject humility in an authentic
– or at least believable – manner?
Thanks, Rusty
