Giving the Vampire Squid Way

“A riddle wrapped up in a mystery inside an enigma,” was Winston Churchill’s description of Russia, but the same might equally apply to Goldman Sachs. On Wednesday it was being lauded by the Committee Encouraging Corporate Philanthropy for the generosity of its $100m “10,000 Women” initiative. Can this really be the same institution that was slammed last year by Rolling Stone magazine as “a great vampire squid wrapped around the face of humanity relentlessly jamming its blood funnel into anything that smells like money.” Can it be possible to be both a great vampire squid and a great philanthropist at the same time?

Let’s start with the philanthropy. 10,000 Women is, in our view, a smart piece of philanthropy that richly deserves the plaudits of the CECP. It is based on a powerful, evidence-based insight (the untapped potential of women in developing countries to be successful entrepreneurs) in order to leverage impact beyond the target group of beneficiaries (the women the scheme invests in will create jobs and create wealth for their societies).

That 10,000 Women is a good initiative is no surprise. As we describe in the book, Goldman Sachs has a long tradition of philanthropy, back to Henry Goldman, the son of one of the founders who supported Albert Einstein’s research, and Walter Sachs, who was the first treasurer of the National Association for the Advancement of Colored People. Becoming a philanthropist has long been expected of those who aspire to leadership at the firm.

Goldman Sachs has also been better than most of its peers in responding meaningfully to the financial crisis. In 2009 it pledged $500m to a “10,000 Businesses” programme that combines grants and loans to help small businesses across America. This voluntary initiative compares favourably to, say, Britain’s banks, which had to be bullied and threatened before they stumped up a combined £200m of loans to Prime Minister David Cameron’s flagship Big Society Bank, that will invest in social enterprises.

The problem is that Goldman Sachs is sticking to what it is good at – making lots of money with one hand and giving quite a lot away with the other. This might have been okay before September 2008, when most people thought that the financial wizardry of Wall Street was socially useful and creating real wealth. Today, with the knowledge that Goldman Sachs was up to its elbows in flogging useless products to its clients (and sometimes using its own money to bet, correctly, that these would fail), that model just doesn’t work anymore.

Great philanthropy – whether it is 10,000 Women or 10,000 Businesses – is important, but it is not enough. In “The Road From Ruin” we argue that the lesson of the crash of 2008 for Goldman Sachs and the rest of the financial sector is that they need to eschew the allure of the quick buck and start focusing on creating long term value. A good start for Goldman Sachs would be to deploy some of its revered brainpower to figure out ways of developing the nascent market for impact investment, an area where it is lagging behind its rival JP Morgan.

If Goldman Sachs wants to shed its reputation as a great vampire squid, it needs to be more than a great philanthropic organisation. It has to show that it has learned from the mistakes of the past and has changed so that its core business is socially useful as well as lucrative. If it can manage that transition it can become a truly great philanthrocapitalist institution.