Goldman Sachs’ Investment Facilitated Sex Trafficking: The Ethics of Owning What You Buy

Posted On: Monday, April 2, 2012

Goldman Sachs finds itself in the very uncomfortable place of having exposed its investment in Backpage.com, one of a myriad of its investments. Backspage is a website accepting prostitution ads that included using under-age teenagers as forced sex slaves.

Goldman’s latest negative headlines raise larger issues that apply to any company investing in other businesses. The problem has huge governance implications as well — a Goldman Managing Director sat for several years on the board of the website’s parent company.
Before going into the particulars of Goldman’s new reputation challenge,  the problem raises several issues, including:

•  What reliable, ongoing mechanisms should companies use to monitor and ensure that the businesses in which they invest do not have activities that violate the investing company’s stated values, or would cause the investor reputation damage if those activities became public?

•  Beyond expecting good management decisions to deliver a solid ROI (Return on Investment), what do board members from investor companies make clear regarding their expectations that business  activities be legal and ethical, and that unintended consequences of decisions be identified to address potential for harm?

• What is investors’ policy if problems emerge? To have the director bail? Or to use his/her or the investing company as leverage to ensure illegal and unethical activity stop?

• Our digital age provides access to information previously unavailable on private companies and their investments; how will that change the range of questions companies ask prior to making decisions, knowing that stakeholders are now global and can react instantaneously on social media against policies?

How did Goldman get linked to Backpage? After some digging, New York Times columnist Nicholas Kristof, who has been looking at sex trafficking of under-age girls, found that Goldman was an investor in Backpage, which has a huge share of the sex ads market.
He contacted Goldman in late March 2012 asking about its 12-year investment in Backpage, which in 2006 became part of Village Voice Media.  A Goldman spokesperson reported back to Kristof on March 31, 2012 that Goldman had signed an agreement to sell its 16 percent stake in the website back to management. Kristof then wrote a column about “Financiers and Sex Trafficking.”

The Goldman spokesperson told Kristof, “We had no influence over operations.” An interesting take on the responsibilities of governance, as Kristof’s column points out. Goldman Managing Director Scott Lebovitz served on the board of Village Voice Media for several years, stepping down in 2010.

Backpage has been a magnet for public outrage. The website has been accused in more than 50 claims filed in 22 states over the last three years of trafficking or attempted trafficking of minors through its “adult services” ads.

In August 2011, 45 State Attorney Generals sent a letter to Village Voice Media regarding “Backpage.com’s ongoing failure to effectively limit prostitution and sexual trafficking on its website.” They included more than 20 questions to which they requested detailed responses.
Unlike Craigslist, who responded to criticism of sex trafficking in its advertising by ending its lucrative adult section in 2010, Village Voice media defends its adult advertising and has rebutted Kristof’s column.

Village Voice Media has a fight on its hands, one that Goldman Sachs opted out of in two stages — financially last week, and from a governance perspective in  2010 when their executive left the board. But it is never that simple.
It raises the question of whether a company “owns” what it buys – whether investments are isolated tools of making money? Or a reflection of what an investor stands for?

Whatever the distinctions the investor may see, increasingly, the firewall of “its just business” has come down. How a company does business, its choice of investments — while still very complex — is slowly becoming information in the public domain.
And companies face the ethics of what you buy you “own.”

Gael O’Brien is a catalyst for leaders leading with purpose and impact. She is an executive coach with a corporate and public affairs background. Gael is President of Strategic Opportunities Group.

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