Why Goldman Sachs Is Sniggering at Sharehholders

A priest, a nun and a rabbi walk into Goldman Sachs (GS) -- and get squashed. No joke. That's essentially what happened today at the banking firm's annual shareholder meeting, when investors rejected a proposal by religious groups urging the company to justify its lavish executive compensation

Goldman earlier this year boosted CEO Lloyd Blankfein's total pay to $19 million, more than tripling his base salary to $2 million, raising his stock-based bonus by 40 percent and awarding him a cash sweetener of $5.4 million. Now here's what the bank got for its money: In 2010, earnings plunged 37 percent and sales fell 13 percent; Goldman shares this year are down 13 percent. Nice job, Lloyd. Said one cleric about the company's pay practices:

"Everybody deserves to be rewarded for their work," said Father Seamus Finn of the Missionary Oblates of Mary Immaculate, who plans to attend the meeting. "But our culture has created the star corporate CEO whose work doesn't deliver the kind of value warranted by that status."

"I don't think that the pay level is justified," Tanner said. "There's a level beyond which pay is not appropriate and needs to be reined in, and I think this company is one of those examples."

Shareholder rights activists might argue that it's up to investors, who after all own public companies, to reclaim control of corporations from the executives that have come to dominate them. In principle I agree. But that is a losing battle at companies like Goldman. Why? Governance.

Rubber-stamping scandal
The reality is that Blankfein, president Gary Cohn and the bank's other top managers run Goldman exactly as they wish. A quick look at its board of directors is enough to tell you that corporate oversight at the firm is, for all intents and purposes, non-existent. Lee Scott, former CEO of Wal-Mart (WMT)? Lakshmi Mittal, founder and CEO of steel giant ArcelorMittal (MT)? James Johnson, former head of Fannie Mae? Stephen Friedman, once the head of the Federal Reserve Bank of New York? Not a group that exactly screams independence from management.

I'll go out on a very short limb and suggest that Goldman will not change one iota so long as such directors are clutching their rubber stamps. This is largely the same board that has nominally overseen Goldman as it causes one scandal after another. It's the same board that today helped shoot down all of the shareholders resolutions aimed at improving pay disclosure and transparency at the company. And it is the same board that shareholders overwhelmingly voted to re-elect today.

Why the joke is on shareholders
The institutional investors who own much of Goldman are notoriously reluctant to rock the boat, of course. From their perspective, they gain little by challenging management. Their focus is on shareholder returns, not rights. It's also worth remembering that computers increasingly pick stocks, not people. Algorithms are largely indifferent to governance, let alone religious scruple.

With little to fear from shareholders and with directors under his thumb, Blankfein is free to crack jokes, as the executive did today when one investor upset about the company's financial performance and ethical lapses suggested he resign. His answer:

And give up all this?

Thumbnail from Wikimedia Commons, CC 3.0; image from Flickr user DonkeyHotey
Related:

• 5 Reasons Goldman Sachs Should Fire Lloyd Blankfein
• How Wall Street and Wisconsin Officials Blew Up the State's Pension Fund
• Goldman Sachs: Why the Bank's Vow to Clean Up Its Act Means Nothing
• A Banking Parable: Goldman Stumbles, CEO Gets a Raise, Risk Grows Higher
• Ethics, Schmethics: Bankers Identify Goldman Sachs as Most Admired Firm