Companies differ on how they handle personal and institutional conflicts of interest. This difference may reflect disagreement over whether a conflict of interest is inherently unethical, or whether one must be exploited for any conduct to be unethical. I take the former position: that to be in a conflict of interest is indeed inherently unethical. At the very least, being in a conflict of interest can trigger or spawn additional conflicts of interest. I point to Goldman Sachs’ response to an institutional stockholder’s corporate governance proposal as a case in point. That case can be contrasted with how the BATs board reacted in terms of corporate governance to bad public relations and a failed IPO.
BATs Global Markets’ directors voted on March 27, 2012 to remove Joe Ratterman as chairman, while allowing him to continue as CEO of the company. The vote came after a collapse of the electronic exchange operator’s initial public offering. The board decided to split the roles of chairman and CEO “in keeping with its goal of setting best corporate practices,” according to a company spokesman. In other words, the vote was in line with an “enhanced corporate governance structure.” According to the Wall Street Journal, the “separation of chairman and CEO roles follows general corporate-governance trends among small and midsize companies.” Might it be, therefore, that the managements of large companies are relatively powerful over their respective boards, and thus able to keep a CEO as chair of the board tasked with holding management accountable?
Also on March 27, 2012, Goldman Sachs announced that it would appoint a lead director independent of the management. On April 3rd, the Wall Street Journal reported that Goldman Sachs had named James Schiro to the position. In its piece, the Journal does not specify who within Goldman made the appointment. Unless it was a group of independent directors on the board, the appointment constitutes a conflict of interest. In other words, if the bank’s upper management had been involved in selecting who would occupy a position responsible for the CEO evaluation, such influence would be unethical (and counter-productive for corporate governance).That Schiro had been on the board since 2009 and was chairman of the board’s audit committee since the fourth quarter of 2010 suggests that a more independent choice could have been made by appointing someone new to Goldman’s board. In other words, if the board had been insufficiently independent, then choosing a preexisting director would not suffice.
I suspect that in not getting a chance to vote at the shareholders’ meeting on a proposal to prohibit the same person from being both CEO and chairman as a result, the shareholders had been duped, in effect, by the “compromise.” The proposal by the American Federation of State, County and Municipal Employees, which as of September of 2011 had 7,101 shares, would have removed Lloyd Blankfein as chairman while allowing him to remain as CEO. It is likely that Blankfein’s power over the board was sufficient to get the proposal removed before being voted on, and Schiro appointed as lead director. No doubt Blankfein and many of his epigones viewed his slick power-play with admiration without paying much regard to the costs to the firm.
According to the Wall Street Journal, the “union had claimed stripping [Blankfein] of his chairman powers would help Goldman repair its reputation and reduce the potential for conflicts of interest.” I contend that the dual-position is itself a conflict of interest, rather than a potential for one, because one of the main functions of a board of directors is to hold the management, which includes the CEO, accountable. To have the person to be held accountable in charge of the body tasked with the making accountable is not only logically a contradiction, but also counter-productive and inherently unethical. It is unethical for any person to be in charge of that which is to render one accountable.
Accordingly, institutional shareholders “have prodded companies to separate the posts of chairman and chief executive, contending that such moves increase the independence of boards and make CEOs more accountable to directors.” This description understates the sordid nature of the duality, for a board headed by the CEO is not independent and the CEO is not accountable to it. It is not a matter of more or less. It is not like a slope on an economic graph showing supply or demand relative to price.
In short, duality is an inherent conflict of interest. Irrespective of what directors or a CEO does, the institutional (or positional) conflict of interest is inherently unethical. One must think structurally here, for it is the design itself that is unethical. This is akin to an unethical corporate policy. A policy to refuse to pay black employees, for example, is inherently unethical (because it is unfair). Even if the company has not acted on the policy, you can bet there would be demands from the public (and rightfully so) for the company to get the policy off its books. Product boycotts would not wait for the policy’s implementation. In fact, I don’t think Al Sharpton and Jesse Jackson would step away from their megaphones unless the company CEO had already renounced the policy as utterly squalid in nature and been thrown into a vat of jello for good measure (and good TV).
Like a racist policy, formally being the chair of the group tasked with holding one accountable is in itself unethical, whether or not a particular chair/CEO has subverted his or her board into accepting a compromise that is convenient for him or her. Removing that sordid design need not wait for a failed public offering or a bad reputation, or even for a chair/CEO’s unethical use of his or her board. Because an institutional conflict of interest is inherently unethical, its being unethical is not conditional on a particular use. It would appear that BAT got the message while Goldman Sachs was still cutting corners in a path of least resistance—to the management, that is.
Jacob Bunge and Scott Patterson, “BATS Chairman Will Give Up Post,” The Wall Street Journal, March 28, 2012.
Liz Rappaport, “Goldman Bows to Pressure on Board,” The Wall Street Journal, March 28, 2012. http://online.wsj.com/article/SB10001424052702303816504577307871991956472.html
Liz Moyer, “Lead Director Named at Goldman,” The Wall Street Journal, April 3, 2012.http://online.wsj.com/article/SB10001424052702303816504577320260845194168.html