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:
One of a board of directors’ main functions is to monitor the performance of the company's management, including the chief executive. It follows that for the same person to serve concurrently as CEO and chair of the board constitutes an institutional conflict of interest in that the CEO is in charge of the group that serves as a check on the CEO. There would also have been a conflict of interest if AFSCME had taken its complaint up with the management, which is under the CEO. No group should thus be left to have the final say on complaints about the group (and especially its head).
Goldman’s management pointing to a “lead director” as somehow providing a check on the CEO ignored the fact that that director was under the board’s chair, who was also the CEO. The management’s claim that the firm had 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. However, practically speaking, anything less would have been insufficient to prompt the appointment of a new chair at Goldman.
At the time of the proposal, Goldman shares already 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 21-48 percent. 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 have benefited from a check on the bank’s management. Unfortunately, AFSCME directly held 7,101 shares of Goldman, worth $741,000 at the market prices at the time, according to pension fund spokesman Chris Fleming. AFSCME's 1.6 million members owned 2.5 percent of Goldman's outstanding shares, worth $1.325 billion.[2] Other institutional investors would have had to be persuaded, and absent bad financial performance, achieving a majority would have been 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. Every company should have the institutional structure of a robust governance system, rather than one containing a blatant conflict of interest. If the problem is managements having too much power in corporate governance, using corporate governance or legislation to 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 in 2011 would have been tantamount to waking up one morning and expecting people to no longer be concerned with power and even their own self-interest. The U.S. Constitution was designed in large part to counter ambition with ambition rather than assuming that people with a lot of power will act selflessly. Perhaps corporate governance could take a lesson from government.
1. “Goldman Should Strip Blankfein of Chairmanship, Pension Fund Says,” Reuters, September 14, 2011.
2. Ibid.
2. Ibid.
