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Thursday, September 15, 2011

Blankfein at Goldman: Losing the Chairmanship?

In September 2011, a pension fund representing U.S. government employees filed a shareholder proposal to strip Goldman Sachs CEO Lloyd Blankfein of his other post as chairman. According to Reuters, “The pension plan of the American Federation of State, County & Municipal Employees said on Wednesday an independent chairman would provide checks and balances in the power structure at the largest U.S. investment bank. AFSCME said splitting the roles of CEO and chairman might have prevented Goldman from getting into trouble for its actions leading up to the financial crisis and will improve its stock performance going forward. ‘A strong, independent Board chair would focus Goldman on generating long-term value for its shareholders,’ AFSCME President Gerald McEntee said in a statement.” Goldman spokesman Stephen Cohen responded, “We think we have a robust governance structure in place, with a very effective independent lead director. We always listen to our shareholders, so it is disappointing that AFSCME decided to go to the media before raising the issue with us.”

Analysis:

One of a board of directors’ main functions is to monitor the performance of management, including the chief executive. It follows that for the same person to serve concurrently as CEO and chair of the board constitutes a conflict of interest—leading the group that serves as a check on oneself. There would also be a conflict of interest in AFSCME taking its complaint up with the management itself, as if the latter would be inclined to act contrary to its interest by agreeing with the complaint against itself.

For Goldman’s management to point to a “lead director” as somehow providing a check on the CEO ignores that that director is under the board’s chair, who is the CEO. The management’s claim that the firm has a “robust governance system” thus rings hollow; robust systems do not contain an obvious conflict of interest. Nor should instituting them depend on there having been bad performance although, practically speaking, anything less would be insufficient to prompt the appointment of a new chair at Goldman.

At the time of the proposal, Goldman shares had dropped 38 percent in 2011, compared with a decline of 43 percent for its chief rival, Morgan Stanley. The other four biggest U.S. banks were down 21 percent to 48 percent. Of course, a given change from a larger base is a lower percent, other things equal. Aside from relative financial performance, the hits to Goldman’s reputational capital since September 2008, including paying a settlement on a fraud claim, suggest that Goldman’s shareholders could benefit from a check on the bank’s management. Unfortunately, “AFSCME directly holds 7,101 shares of Goldman, worth $741,000 at current market prices, according to pension fund spokesman Chris Fleming. AFSCME's 1.6 million members own 2.5 percent of Goldman's outstanding shares, worth $1.325 billion.” Other institutional investors would have to be persuaded, and absent bad financial performance, achieving a majority would be difficult.

My point is simply that recognizing the chair of a board as an inherent check on a company’s management ought not depend on the owners of enough shares being persuaded by bad financial performance. That is to say, every company should have the institutional structure of a robust governance system. Given the power of managements on elected representatives through campaign contributions and lobbyists, a law mandating such a structure is unlikely even if it would be in the long term best interest of shareholders regardless of company. If the problem is managements having too much power in corporate governance, using corporate governance or legislation reduce that power is apt to be a non-starter. Going to management for the reform would be sheer insanity. Expecting Lloyd Blankfein to voluntarily give up the chairmanship at Goldman would be tantamount to waking up one morning and expecting people to no longer be concerned with power.  

Source:

Reuters, “Goldman Should Strip Blankfein of Chairmanship, Pension Fund Says,” September 14, 2011. http://www.huffingtonpost.com/2011/09/14/goldman-blankfein_n_962948.html