Thursday, March 4, 2010

Goldman Sachs Ignores Its Shareholders’ Concerns About Bonuses

In December, 2009, Goldman Sachs announced that it would not pay cash bonuses to its most senior executives. Their bonuses were paid in the form of restricted stock instead. Some applauded Goldman for this decision, claiming that it was an appropriate response to the taxpaying public's understandable outrage about large bonuses for bankers after having bailed out Wall Street's financial institutions. That same month, Goldman also announced that it would at some point in the future give its shareholders the opportunity to vote on executive compensation. The shareholder vote, however, would be nonbinding.

Now, just a little more than two months later, Goldman, a bailout benficiary whose managers exposed the bank to toxic mortgage-backed securities, is ignoring shareholders who are complaining about 2008 and 2009 bonuses. An individual shareholder and an institutional shareholder (a pension fund) have filed two separate shareholder derivative suits complaining that the bonuses are excessive and asking for corporate governance changes.

Goldman Sachs spokesman, Michael DuVally told the media that "the lawsuits are completely without merit". Goldman's board has refused shareholder demand letters asking that the board investigate the company's pay practices. A vigorous defense is to be expected, but Goldman's response leaves so much to be desired. Of course the firm will not ask executives to give the bonuses back, as the shareholder plaintiffs asked. Of course the firm will move to have the suits dismissed and the court will do so, deferring to the board's decisions under the business judgment rule. But what about the part of the shareholder suit and the demand letter that simply ask the board to review its compensation-related practices? It's unfortunate that the board did not take the opportunity to respond to the litigation and to the demand letter with a sincere promise to at least listen to shareholders' concerns about pay decisions.


  1. Elizabeth StyonsMarch 5, 2010 at 9:24 AM

    I find it troubling that after promising not to issue bonuses to their executives, Goldman-Sachs does so anyway. I know executives work hard, but after everything that has happened with the economy and the bailouts, I'm surprised these extravagant bonuses are still happening. It is too bad their shareholders have to file a derivative suit to even get the board to acknowledge their concerns. However, it will probably not result in the bonuses being revoked.

  2. Zshakira CarthensMarch 5, 2010 at 9:34 AM

    I also feel that it is rather unfortunate that the Board did not at least agree to review their compensation practices. The shareholders have good reason to be concerned with the large bonuses being given out to companies who received bail-out money due to their own poor decisions. I'm sure the shareholders know the odds of being successful in their derivative suit. They knew the directors would have the protection of the BJR, and they knew they would deny demand; I think were expecting not to win, but to get the company's attention and encourage them to review their practices. It's ashamed that the spokesperson did not sound more sincere in addressing the shareholder's concerns. Saying that the claims are meritless does not say anything. This is precisely the problem many have with a lot of these large corporations: their arrogance, and lack of attention given to the concerns of shareholders even when shareholders have reason to be suspicious.

  3. An individual shareholder and an institutional shareholder (a pension fund) ...

    What percentage of shareholders did these plaintiffs represent? Maybe Goldman is right to ignore them and dismiss their claim as without merit if it is not representative of the opinion of the majority of shareholders. And why is it that we never hear anyone complain about the bonuses paid at Fannie and Freddie, the two companies most responsible for the financial crisis? After all, they are now owned entirely by the taxpayer and, unlike Goldman, their bonuses come out of our pockets. And why has there been absolutely no concessions from the UAW and their bosses after they received tens of billions of dollars from taxpayers? The UAW's arrogance and lack of concern for the competitiveness of the industries they work in has been rewarded with taxpayer money.

  4. Apparently some people choose not to read the blog they comment on because if they had they would have read ample evidence to see that Fannie and Freddie were merely a symptom rather than the cause of the financial crisis. Additionally, partisan blinders must be the cause of a tirade against the UAW, because the facts show that the UAW was clearly willing to compromise to reach a deal to make sure that the auto industry in America did not completely collapse. Though maybe you still agree with the views of Phil Gramm, architect of anti-regulation policies and believe that this is only a "mental recession."

  5. Fannie and Freddie were merely a symptom rather than the cause of the financial crisis ...

    Apparently some people need to read a little more broadly. This blog is extremely partisan, often linking to studies from left-wing think tanks with very little offered in the way of balance. Fannie and Freddie were at the very heart of financial crisis. Nearly two thirds of all subprime and Alt-A mortgages were purchsed by Fannie and Freddie. They provided, at the direction of the government, the capital and the market for subprime and Alt-A mortgages. Fannie and Freddie knowingly conducted a fraud, routinely misrepresenting the mortgages they were acquiring in order to get higher credit scores on the trillions of dollars of MBSs and CDOs they sold.. Many banks loaded up on these MBSs and CDOs because of the extremely favorable treatment that they received under the Recourse Rule, as long as they were issued by a GSE or were rated AA or AAA.. Internal memos show that the execs at Fannie and Freddie knew exactly what they were doing and the risks that they were creating in the financial system, but they did it anyway. They were not "merely a symptom".

    Even George Soros, the man who bankrolls much of the research linked to on this blog, agrees that the GSEs kicked off this crisis:

    These public private partnerships are very, very dangerous. The most rotten part of the financial system in the U.S. consisted of the government sponsored entities, Fannie Mae and Freddie Mac. They really kicked off this crisis.

    - George Soros

    ... the facts show that the UAW was clearly willing to compromise ...

    The facts show just the opposite. Here's the anouncement from the UAW outlining the agreement reached with the government. It states clearly that UAW members were reqired to give up NOTHING in return for billions of dollars of taxpayer money:

    For active members these tentative changes mean no loss in your base hourly pay, no reduction in your health care and no reduction in your pensions

    UAW Modifications to 2007 Agreement

    What's more, they were given a free ride on their pensions, which are underfunded by tens of billions and are insured by the taxpayers through the PBGC. This means that, unlike workers at most private companies, UAW members pensions will be paid by you, your children and grand children. Why?

  6. "fannie and freddie were at the very heart of the financial crisis."

    typical fringe right wing, trickle-down trope.

    for the proposition that folks should "read more broadly" and that "nearly two thirds of all sub prime loans were purchased by fannie and freddie" readers are directed to an OPINION piece published in the wall street journal by peter wallison (a fellow at a far right think tank). ridiculous. the next factual assertion uses the same support methodology (opinion piece in wsj directly from fringe right wing think tank).

    next, readers are linked to another right wing think tank (cato institute) to support incredibly partisan assertions. apparently "reading more broadly" only entails conservative right wing, corporate bankrolled talking points and opinion framers. while the cato institute article was less dogmatic and much more thoughtful than the comical opinion pieces, it CITES wallison and other apologists for its claims. still, while the cato article does not support the posters' point that feddie, fannie and the community reinvestment act are singularly to blame for the market crisis, it DOES make several useful points:

    first, current governmental regulation of the capital markets is a disaster;

    second, lawmakers and regulators simply continue to stack new regulation on top of existing regulation with little understanding of what exists already and little thought given to unintended consequences;

    third, that when given a regulatory gap or bubble, bankers, lenders, speculators and executives will exploit that gap or bubble in a profit driven frenzy, consequences be damned.

  7. The purpose of linking to those sources was to give you the other side of the argument, something you will not get here. As for Peter Wallison, unlike other analysts, he has the distinction of having foreseen the current crisis and having warned about the potential consequences. I notice that you provide absolutely no evidence to support any of the arguments you make. If your argument is that, in fact, Fannie, Freddie and the others listed in the op-ed did not purchase nearly two-thirds of the subprime and Alt-A mortgages, and that they did not misrepresent the credit scores of the mortgagees supporting the CDOs and MBSs, a charge made by a former chief credit officer for Fannie Mae, support it. If you have evidence that contradicts the internal memos showing that the GSEs knew that their behavior was creating risk in the financial system, as reported by the Washington Post, let's see it. Let's see you refute this simple, logical assertion:

    Mortgage brokers had to be able to sell their mortgages to someone. They could only produce what those above them in the distribution chain wanted to buy. In other words, they could only respond to demand, not create it themselves. Who wanted these dicey loans? The data shows that the principal buyers were insured banks, government sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac, and the FHA—all government agencies or private companies forced to comply with government mandates about mortgage lending.

    - Peter Wallison

    As for charges of partisan rhetoric, not even George Soros, the owner of the Democrat Party, agrees with you.

    I take the time to read blogs, like this one, in an effort to expose myself to different sides of an issue, something you apparently do not. Incapable of thinking on your own, you simply assimilate the dogma of your professors, never seeking out the other side or challenging their assertions. You are not a thinking person, you're a parrot.

    The CATO Institute, for your information, is libertarian, not right-wing.

  8. I am truly amazed at some of the responses that many board members make to press or even to their shareholders. But, when I do analyze those statements there is only one word that seems to jump out at me. That word is arrogance. I do respect the purpose of the BJR and I would agree with many of my colleagues that this rule is needed to facilitate business. However, as my mother told me when I was younger, “If you give a person an inch they will most certainly take a mile.”

    These board members know that many of their decisions will be protected by the BJR whether there is public outrage or not. With that being said, what discourages them from making decisions that will only seem to benefit themselves? These board members would not even take into consideration the complaints given by the same people who elected them. The people whose interest they agreed to protect. This amount of arrogance is scary.

  9. anonymous.

    you are joking right? i am not a student. nor am i a parrot. i have no professors telling me how to think. as you hoped by posting a comment (i assume), i carefully read each of the links that you posted (and i generally read very broadly) and came away with my own impression that all of your sources are right wing think tanks, bankrolled by corporate interests peddling the same trope. i indicated what i thought was useful from your postings (not much, but a few points).

    most of what you peddle in your comments are dependent on individuals NOT thinking for themselves (see blaming fannie and freddie and the community reinvestment act for the financial crisis; see also fox news, death panels etc.). much of it is humorous.

    the cato institute, for your information, claims to be libertarian.

  10. I assume that the anonymous commenter who thinks that Fannie and Freddie were the cause of the financial crisis would therefore agree that any regulation of the financial sector is no longer necessary. While both sides can certainly find articles to link to to support whatever proposition your argument lacks logical consistency. If Fannie and Freddie were the cause why have we experienced a financial crisis, why is this crisis worse than that of the Savings and Loans crisis in the 80's and 90's? Might something else have gone wrong? What about the vast over-leveraging of financial institutions a cause? Proprietary trading? What about the credit rating agencies? Is Wall Street entirely blameless? Or is it that your argument fits neatly into your own one-sided view of the world?

    And as far as the UAW goes certainly you must not be arguing that the UAW should have to re-negotiate their collectively-bargained agreements over their pensions and wages to which they are legally entitled to because GM couldn't understand that no one wants to buy Hummers any more?

    While you say that you read this blog for a differing perspective it is quite interesting that you reject any argument it makes out of hand. But perhaps your arguments cannot stand up to any scrutiny.

  11. i carefully read each of the links that you posted (and i generally read very broadly) and came away with my own impression that all of your sources are right wing think tanks, bankrolled by corporate interests ...

    Apparently, you are unable to refute Wallison's arguments and instead attempt to dismiss them as a conspiracy of "corporate interests" and that evil FOX News. You also seem incapable of making a coherent argument of your own. You're right, you are not a parrot; parrots can learn.

  12. And as far as the UAW goes certainly you must not be arguing that the UAW should have to re-negotiate their collectively-bargained agreements ...

    That is exactly what I am saying.

    There is no job security outside the viability of the company that you work for. The UAW's "collectively-bargained agreements" were and are the source of the automakers problems. Why shouldn't they, as the cost of putting their hands in our pockets, be forced to deal with that reality and make adjustments? Millions of Americans have lost their jobs in this recession, what entitles the UAW to special treatment? Why bail them out and leave others, who have not extorted unrealistic compensation from their employers, to fend for themselves? Could it be the millions of dollars in campaign contributions that the UAW has made to Democrat politicians? Could that be why they got such a sweet deal at the expense of the taxpayers and the senior secured creditors? And why are we, as taxpayers, insuring their pensions through the PBGC? The government doesn't insure the private pensions of non-union workers. You may believe that it is your responsibility to provide the UAW with jobs and retirement benefits, I do not.

  13. sorry anonymous.

    i do not respond to (refute) wall street journal OPINION pieces that you appear to accept, hook, line and sinker as gospel. that is YOUR source. please. how about some evidence to back up what you are saying (if you can). oh, and wall street journal opinion pieces do not count as evidence.

    you are funny.

  14. I agree with Mr. Goodson that "board members know that many of their decisions will be protected by the BJR whether there is public outrage or not." It is a shame that the Board has made a promise that it did not intend to keep, but at the same time they made a judgment call and the Business Judgment made may not have corresponded with the promise made to its shareholders. They were in their full right under the business judgment rule to do so. Now at the same time it may have been a poor decision based on the fact that no one may want to purchase shares and stock into such a deceitful corporation. as far as not listening to the shareholders whole filed the derivative suit, as the first anonymous poster stated, the shareholders may have been minority shareholders who did not have as much "clout" (voting power) and the board therefore dismissed. Sad maybe, but within their full right. It's a business. It happens.

  15. I am glad that the corporation has decided to put a freeze on the senior executives salaries.I think that during this economic downturn it is especially important to be conservative with the financial responsibilities of the company. I think it is a bad idea for the shareholders to ask the corporation to retroactively try and get the money back from executives for the past two years. And now they are trying to bring a shareholder derivative suit but the corporation is going to be protected under the business judgment rule. And unless the shareholders are able to show that the corporation fell within one of the exceptions the ruling will likely stand. However I think the shareholders should ask for a vote to put certain specifications into place for any type of future monetary transactions.
    David H. Kenton

  16. I am in favor of financial reform in its purest form for the simple reason they help prevent fraud. Many of the large institutions hand out advice and trade against it. Goldman Sachs, Merrill Lynch, CITI Bank are all accused of front-running trades. For example Goldman Sachs is best viewed as a hedge fund. It is ridiculous that such an operation can borrow money from the Fed for virtually nothing and not only trade that money, but trade against the advice they are handing out to clients, with leverage! Expecting trading divisions to not talk to investment advice divisions within a single company is like expecting unsupervised teenagers in a room with a keg of beer to not drink. So what’s the solution? The first thing I would do is remove the bank holding company status of Goldman Sachs which helped them access liquidity and funding during the crises through tax payer money. The second thing I would recommend is to literally separate the trading division and the units that give advise. I believe it is unethical if not outright fraudulent to front run trades or to trade against advice given to clients. Units that offer advice must be physically separated, not rationally separated from units that trade their own accounts. The only sure way to make that happen is to physically breakup the divisions into separate companies. Outside of that, I don’t care what Goldman does or how much money they make or how much bonuses they hand out, as long as taxpayers are not on the hook for what they do.

  17. Jamil Davis

    I always find it interesting to see how people react during turbulent times. These practices have been going on for decades now and finally the shareholders have decided to make a stand. The shareholders have just as much duty to stay aware of what is going on with their investment as do i corporation's duty of care to them. Maybe the past lack of interest has something to do with today's investor mentality where mutual and hedge funds are prominent. Where everyone is so set on making a quick dollar that they never realize what is actually occuring around them. I hope that their interest will be sustained and can be a stepping stone toward sounder financial involvement.

    As for Goldman Sachs, they are failing rule 1 of business: always make the customer feel as though you care. It just shows their arrogance that they won't even attempt to appease the inquiries by the shareholders. Even if you do not make any modifications or changes, atleast the shareholders feel as though you have made an effort. To turn their backs on the shareholders as if they are a child, is not only unsound but also disappointing.