An Institutional Conflict of Interest in Corporate Governance: The Case of Goldman Sachs

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 of the board. 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.”[1]

Analysis is at "An Institutional Conflict of Interest in Corporate Governance: The Case of Goldman Sachs."

1. “Goldman Should Strip Blankfein of Chairmanship, Pension Fund Says,” Reuters, September 14, 2011. 

God's Gold through the Centuries

In the wake of the financial crisis that came to a head in September of 2008, people might have been wondering if sufficient moral constraints on the greed on Wall Street are available, even possible. The ability of traders to create complex derivative securities that are difficult for regulators to regulate, much less understand, may have people looking for ethical or even religious constraints. It would be only natural to ask if such “soft” restraint mechanisms really do have the puissance to do the trick. Here’s the rub: the tricksters are typically the last to avail themselves of ethical or religious systems, and they the wrongdoers are the ones in need of the restraint. Blankfein said of his bank, Goldman Sachs, that it had been doing God’s work. About a week after saying that, he had to walk his statement back and admit that the bankers had does some things that were morally wrong. Although divine omnipotence is by definition not limited by human ethical systems, it is hard to imagine a divine decree telling bankers to tell their clients one thing (buy subprime mortgage derivatives) while taking the opposite position on the bank’s proprietary position (shorting the derivatives, beyond being a counterparty to clients). Divine duplicity seems to represent an oxymoron on a megascale rather than a justification for greed. As the crisis erupted and was subsequently managed by public officials in government and new managers brought in to salvage AIG, I was researching the history of Christian thought on profit-seeking and wealth. I have since published an academic text and a nonfiction book, which develops further on the treatise on the topic. As the book is too recondite for sane people (i.e., outside of academia), I am writing a non-fiction book on the topic for a broader readership. To whet the appetites of those of you who are waiting for something more readable than a recondite thesis, I present a brief account of my original research on the topic here. 

For the full essay, see "God's Gold through the Centuries."

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See related essay: "Religious Sources of Business Ethics"

The academic treatise: Godliness and Greed: Shifting Christian Thought on Profit and Wealth 

The non-fiction book: God's Gold: Beneath the Shifting Sands of Christian Thought on Profit-Seeking and Wealth.

God's Gold on Wall St.: A Vaunted Self-Assessment of God's Work

A year after the financial crisis of 2008, Lloyd Blankfein, the CEO of Goldman Sachs,  found himself vilified for his firm’s quick return to risky trading in spite of its new bank holding company status. Populist resentment at the time was especially pitted against the hefty bonuses from the trades. Also, people were upset about the benefits that the bank had obtained from the decisions of its alums in the U.S. Government—specifically, in the U.S. Department of the Treatury. For instance, Goldman Sachs and other AIG counterparties got a the dollar-for-dollar payout from AIG thanks to an infusion of funds for that specific purpose by Treasury. Regardless, in an interview with the London Times, the highest-paid CEO (at least in the financial sector) dismissed such talk and defended his money-making machine and its compensation.  In addition to being the engine of economic recovery, according to Blankfein, Goldman Sachs provides a social function in making capital available to companies so they can expand. Stunningly, he adds, “I’m doing God’s work.”[1]  Such a claim is a far cry indeed from Thomas Jefferson’s warning that banking institutions are more dangerous to our liberties than standing armies.[2]  Perhaps God intends to undo our liberties by bailing out the banks.

The full essay is at "God's Gold on Wall St."
See related books: God's Gold and Essays on the Financial Crisis

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[1] John Arlidge, I’m doing ‘God’s work. Meet Mr. Goldman Sachs, The Sunday Times, 11/9/09.

[2] Thomas Jefferson to John Taylor, Monticello, May 28, 1816, in Paul L. Ford, ed., The Writings of Thomas Jefferson (New York: G.P. Putnam’s Sons, 1892-99),  XI, 533.

When Corporate Governance Gets Cozy: Chair/CEO Combo as a Structural Conflict of Interest

Eric Jackson, an activist investor and hedge fund manager, charged Goldman’s board as being too cozy and too lacking in financial know-how to diligently oversee the top management. He claimed the board was packed with honchos who led companies that had paid large fees to Goldman. Allowing clients representation on a board is itself a structural conflict of interest because the client role is not in line with acting in the stockholders’ interest on the board. The hedge fund manager pointed to Indian steel magnate Lakshmi Mittal and former Fannie Mae chief James Johnson as cases in point. Related to the client orientation is an affinity to the management, whose managerial decisions bear on the clients. Indeed, Jackson noted that “these people seem to be favorably disposed to senior management’s way of thinking,” and are therefore unlikely to act as a check on CEO Lloyd Blankfein and his team.

The full essay is at Institutional Conflicts of Interest, available at Amazon.

Client-Centered Ethical Leadership: A Recipe for Trust at Goldman Sachs

With its incentive-structure that rewards a quick profit on the next trade even at the expense of advising clients in line with their long-term interests, Wall Street has its work cut out for itself even in maintaining trust, which, after all, is the basis of a market. On March 15, 2012, the New York Times reported that over all, “the percentage of people who have little or no faith in the fairness of investment companies rose to 41 percent in 2011 from 26 percent in 2008, according to Yankelovich Monitor 2011.” Even banks and insurance companies fared better, and household income played no role in the findings. At the time, Goldman Sachs was doing its industry no favors in terms of reputation. Indeed, the “best and the brightest” on Wall Street had created or enabled a rather narrow and self-serving corporate culture and a lack of ethical leadership that could otherwise turn around the bank by transforming its dysfunctional culture.

The full essay is at "Client-Centered Ethical Leadership."

Goldman Sachs: Working It

Goldman Sachs’ (GS) board considered buying AIG in late June, 2008, so GS could use AIG’s premium float for capital (rather than becoming a bank holding company and using deposits to fund trades or as collatoral for leveraged trading).  Strangely, GS’s board didn’t realize that another part of GS was questioning the “mark to market” valuations that AIG was making on its swaps.  Also, AIG had revised its November and December 2007 losses from $1 billion to $5 billion.  GS and AIG had the same public accountant (Price), which GS was using to get AIG to down-value the value of its assets. On that week in September, 2008, when Lehman went under, JP Morgan and GS were working to put together a loan of $50 billion to cover AIG’s deepening hole  At the same time, the two banks were demanding new collateral payments from AIG, pushing the insurance giant deeper into its hole.  The Fed and AIG wondered if the fees and interest rate being set by the two banks for themselves and other contributing banks wasn’t essentially stealing the company.

The full essay is at "Goldman Sachs."

God's Gold: Banking and Monopoly

A decade or so into the twenty-first century, a typical business practitioner might suppose that godliness and greed live in two utterly different universes—Wall Street and Main Street both being subject to the sway of greed rather than the bliss of the heavenly hosts. The world is profane, while the sacred lives in some other shoebox. Even so, the oil and water have been allowed to mix, though of course without fusing into one compound. For example, God has been invoked to justify profit-seeking and wealth, and even love of gain, or greed. The relationship between greed and what we take to be the divine is actually more complex than meets the eye.

The full essay is at "Banking and Monopoly."

Leadership at Goldman Sachs: Mice or Men?

Inevitably, with any focus comes the opportunity cost of the benefits that could have come from alternative agendas. Put another way, a sustained focus on particular trees means losing the benefits that go with looking at the forest as a whole. One might ask whether Wall Street bankers, even those in lofty positions, are too focused on marginal differences even as the bankers stay away from operational oversight. Goldman Sachs, being led by a former trader, may have been a case in point as 2012 succumbed to 2013.

The full essay is in Cases of Unethical Business, which is available at Amazon.

Batting Better Than Goldman Sachs on Corporate Governance

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.


The full essay is at Institutional Conflicts of Interest, available in print and as an ebook at Amazon.

Paper Tigers: Firewalls Forestalling Institutional Conflicts of Interest

Structural, or institutional, conflicts of interest are of great significance in applied ethics, even though they often play second fiddle to the conflicts centered on a person’s particular interests. An organizational or institutional conflict of interest, whether within one organization or in the arrangements between organizations, is not any less unethical than a personal conflict of interest.  Therefore, when we take the claims of vested organizational interests that their internal firewalls are more than just paper tigers at face value, our foolhardiness can really be at our detriment. I present a few cases to suggest that “firewalls” in an organization to prevent it from a conflict of interest are, in general, insufficient and thus ought not be relied on. Instead, the public (or government regulatory agencies) should insist that one of the two interests in an institutional conflict of interest be given up.

The full essay is at Institutional Conflicts of Interest, available at Amazon.