Goldman (GS) Rejects Shareholder Demands

The board of directors of Goldman Sachs (GS), Wall Street’s most profitable investment bank, has rejected demands from a group of shareholders that the firm investigate excessive compensation. The group also demanded that the company recoup some of the awards given to high level executives.

 

For 2009, Goldman made its smallest payout as a percentage of revenue in its history as a listed company. However, revenues were at an all-time record high in 2009 resulting in the firm putting aside $16.9 billion for compensation, or as much as $500,000 per employee on average. That’s like saying the government in Zimbabwe paid out a record $25 for illegal and violent land expropriations.

 

According to the company, it received letters from a number of shareholders demanding the firm overhaul the way it determines salaries, benefits and compensation, including bonuses. Goldman's board "rejected the demands."

 

Shareholders have proceeded to file lawsuits against Goldman with the main charge the accusation that the board of directors "breached its fiduciary duties". According to financial regulations, boards must act in the interests of shareholders. Failure to do so could be interpreted as a breach of fiduciary duties resulting in compensation to the affected parties. Such suits are common in the United States due to the subjective nature of the financial markets.

 

Goldman has faced increased scrutiny in recent weeks after coming under fire for structuring swap agreement with the government of Greece, about which I wrote. Such public relations nightmares are starting to take their toll on the reputation of the firm. Goldman should seriously heed such warnings – lack of trust and confidence destroyed Bear Stearns and Lehman Brothers (while ironically making Goldman stronger). Indeed Goldman has heeded the warning to an extent: in it’s most recent annual report, the firm warns about "negative publicity" and also said that “press coverage, true or not, that claims the bank has been involved in wrongdoing often results in some type of investigation by regulators, legislators and law enforcement officials or in lawsuits." Bad publicity "can also have a negative impact on our reputation and on the morale and performance of our employees”, the firm said.

 

Executives at the firm have come out in support of pay practices at the company. The latest rhetoric is that top employees should be paid fairly, based on performance, profits and the economic environment. Strange then, one year after receiving a government bailout and converting to a bank holding company (effectively staving off potential bankruptcy) Goldman is paying out higher compensation in absolute terms than ever before.

 

In order to quell public outrage Goldman has slashed executive bonuses, nevertheless granting chief Lloyd Blankfein $9 million in stock. In 2007, Blankfein was paid $68.5 million.