On the outside looking in

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Expert Perspective by Grahall’s OmniMedia Editorial Board

expert perspective telescopeIn her November 20, 2009 article, “Goldman Holders Miffed at Bonuses Some Investors in the Stock Urge That More of the Riches Be Passed Along to Them”,  Susanne Craig says:  “Some of the largest shareholders in Goldman Sachs Group Inc. have urged the Wall Street firm to reduce the size of its bonus pool, arguing that it should pass along more of its blockbuster earnings to investors…”

Shareholders are certainly a group of folks whose concerns Boards need to address.  The interesting situation here though is that Goldman was a private partnership for 130 years (founded in 1869) before going public in 1999.  The May 17, 1999 issue of Business Week contained an article titled “Goldman Sachs: How Public is this IPO” by Leah Nathans Spiro.  That article shared that at the time of the IPO in 1999 “By far the biggest chunk of Goldman–some 48.3%–is still owned by the 221 former partners… The next biggest chunk, some 21.2%, is owned by Goldman nonpartner employees. Some 17.9% is owned by retired Goldman partners and two longtime investors, Sumitomo Bank Ltd. and Hawaii’s Kamehameha Activities Assn.  That leaves 12.6% of the stock for the public. But on closer inspection, few of the public shareholders were folks who happened to be lucky enough to “snare a few shares”. The articles goes on to say that of this 12.6%, Goldman placed “almost every share in the hands of its own customers.”

So for 130 years as a private partnership, Goldman’s partners kept all the profits for themselves.  At the time of the IPO nearly 90% of the stock  was in the hands of Goldman Partners, Goldman employees, and Goldman retirees.  That “shareholder block” was pretty powerful, essentially ensuring that Goldman could do what they wanted without fear of much uproar from shareholders. 

Fundamentally, in a publically traded company there are perhaps 2 or maybe 3 external forums that could impact decisions about executive pay and bonuses.  First there are the shareholders who, if they don’t like pay decisions, can vote differently than management recommends attempting to replace directors or by voicing their concerns if a “say on pay” vote is included. Shareholders can also “vote with their feet” by investing their money differently.  However, Goldman has been a great investment for shareholders and it’s not likely that many would sell their stock to make a statement over compensation decisions (especially since the largest block of shareholders still remains Goldman’s own partners, employees and retirees). 

Second (and maybe third) there are regulators and legislators.  The SEC create some issues by questioning Goldman’s CD&A but as we said in our recent blog Read Our Lips  the  only “enforcement” power that the SEC holds …  is to write a letter requesting a rewrite of the CD&A along with a proxy amendment. While some might consider the need to amend a proxy may raise red flags with securities analysts, the CD&A is a relatively unimportant part of the proxy disclosure and proxy amendments resulting from changes in the CD&A would not cause the analysts much concern.  And unless our legislators (i.e., our government) is a significant shareholder (think Citibank, BofA and AIG) it is unlikely they would have much impact on compensation.

So with the deck stacked in their favor, Goldman will keep on being Goldman. Perhaps they are reveling in being the highest payers and the highest paid. Goldman partners are likely saying among themselves “We are king of the hill and we don’t care who knows it, since it is great for recruiting and retention of the best talent.  And anyway, according to Lloyd Blankfein we are doing ‘God’s work’, so He must be on our side.”

Contact Grahall’s OmniMedia Editorial Board at edie.kingston@grahall.com

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