Opportunity Costs: Turnover

Wednesday, October 27, 2010

In my career, I have worked for a number of organizations in a number of industries. Most have recognized the value of their organization’s reputation within the community as an employer and the significance of their specific brand, even if that brand includes the color “blue”. Goodwill, in all its forms, is so significant to most organizations that the Financial Accounting Standards Board has issued a rule, Statement of Financial Accounting Standards (SFAS) 142, which provides directions on how to “account” for such intangible assets.

The “value” of Goodwill as an intangible asset is simply the difference between the fair market book value of an organization and price paid by the purchaser. And, since beauty is in the eye of the beholder, so, to some extent is Goodwill.  Goodwill includes items such as the organization’s brand recognition (Coke, IBM, Ford), location (Caesars Palace, Las Vegas), market share (Boeing, Airbus) … etc. As part of overall Goodwill an organization’s community relations, image, and reputation is vital to its ability to acquire financing and attracting and retaining talent. Damage (Impair it) an organization’s community relations, image, and reputation and it may find it increasingly difficult to hire and retain the talent it needs to be successful. Consider the oil spill associated with BP, some otherwise loyal customers might be reluctant to buy from BP gas stations.

In Goldman Sachs' 2010 annual report, it warned current and potential investors about a possible loss of Goodwill. In its statement, Goldman acknowledged that, "Adverse publicity, governmental scrutiny … can also have a negative impact on our reputation and on the morale and performance of our employees, which could adversely affect our businesses and results of operations." Clearly, Goldman was concerned about the loss of Goodwill and in part, its impact on the “morale and performance of [its] employees”. What was the impact on Goldman’s recruiting and hiring efforts? Were there employees who quit out of their concerns for the ongoing viability of the organization? How many applicants elected not to pursue a career with Goldman? Was Goldman forced to spend more on recruiting, offer higher starting salaries or recruit more to overcome a potential loss of Goodwill? Goldman may never know that it lost future organizational leaders due to a loss of something as intangible as Goodwill.

What was the opportunity cost associated with the impairment of Goldman’s Goodwill? As disclosed in its 2009 10-K report to the Securities and Exchange Commission, Goldman reported its total “Goodwill and Identifiable Intangible Assets” for 2008 at $3.523m and for 2009 at $3.543m. We will not know the impairment of Goodwill until the 2010 report is released sometime in 2011. While this may seem like a small amount compared to Goldman’s total assets in the hundreds of billions of dollars, for a small struggling start-up business it might be too large a barrier to overcome.

Organizations with high turnover have a large cadre of former employees who may be impairing its Goodwill. In the same manner that organizations select their employees, job applicants are influenced by the organization’s Goodwill or its lack.