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Goldman Sachs (NYSE: GS ) claims that having Lloyd Blankfein serve as both CEO and chairman promotes accountability, but one key shareholder vocally disagrees -- and rightly so.
CtW Investment Group is calling for an independent chairman because it believes that even with the presence of a lead director responsible for evaluating the CEO and approving the chief executive's agenda for board meetings, Lloyd Blankfein's dual role as CEO and chairman still contains conflicts of interest.
And CtW is right. Allowing Blankfein to continue serving as both CEO and chairman undermined accountability. His remaining agenda-setting power, and his role as the presiding officer at board meetings still has the potential to undermine the board's ability to provide robust oversight of management, and to provide effective guidance on corporate strategy.
But if it's up to Goldman, shareholders will never get the chance to vote on the issue. Earlier this month, Goldman Sachs submitted a "no-action letter" to the SEC expressing its intention to omit CtW's proposal from its 2013 proxy materials.
In my view, investors should be concerned both by Blankfein's continued role as both CEO and chairman, and by Goldman's anxiousness to prevent shareholders from voting on the issue.
A lead independent director isn't enough
In its supporting statement, which can be found in the no-action letter linked above, shareholder CtW Investment Group points out that a company's chairman is responsible for promoting "robust accountability and oversight of management, and to provide effective deliberation of corporate strategy." It suggests that Goldman's decision to let the same person occupy the role of CEO and chairman undermines this goal, even with the presence of a lead independent director.
To decide whether CtW is right, we need to look at the responsibilities still afforded to Blankfein under the lead director structure, and determine whether any of those responsibilities are in conflict.
I grant that Goldman's lead director model does remove the most obvious conflicts of interest that can exist when the same person serves as CEO and chairman.
- Its lead director structure does not place the responsibility of evaluating the CEO in the hands of the chairman. In other words, it doesn't allow Blankfein to evaluate his own performance. Goldman instead places responsibility for evaluating the CEO under the Corporate Governance and Nominating Committee, which is headed by the lead director and composed entirely of independent board members.
- The Corporate Governance and Nominating Committee is also responsible for evaluating the performance of board members, which may help undermine pressure that board members might feel to base their decisions on Blankfein's preferences.
- Finally, the CEO/chairman does not set his own pay. It is instead determined by the Compensation Committee, which is also composed entirely of independent board members.
However, I believe there are still significant areas where the CEO and chairman roles can come into conflict.
First, while Goldman's lead director reviews and approves the agenda for board meetings, and has the ability to add items to the agenda, the ultimate responsibility for agenda-setting remains with the chairman. Why is this significant?
Imagine students could set their teachers' agenda for which assignments to focus on when evaluating their work and providing feedback. This would have a tremendous impact on the teacher's ability to offer meaningful guidance and evaluations, even if the teacher were responsible for approving that agenda. Similarly, the ability to set the agenda for board meetings can have a tremendous impact on the board's ability to provide "robust accountability and oversight of management, and to provide effective deliberation of corporate strategy."
Second, Blankfein is still responsible for presiding over Goldman's board meetings. While the company claims this responsibility includes "[encouraging] directors to voice their views," this description also implies that Blankfein has the power to give more floor time to directors who support his favored initiatives.
Keep in mind that these conflicts can arise even if Blankfein does not intentionally manipulate the system for personal gain. As CEO, Blankfein has a vision of the company based on his experience as senior-most manager. This vision would be nearly impossible to put aside as Blankfein tries to meet his responsibility as chairman to facilitate an environment in which board members are comfortable presenting a vision that conflicts with his own.
Exploiting a technicality to shut down dissent
As concerned as I am about these conflicts of interest, I'm even more worried about what Goldman's attempts to keep shareholder calls for an independent chairman off the ballot say about its culture and openness to dissent from shareholders.
Goldman's move to exclude CtW's proposal from its 2013 proxy materials rests on its claim that the proposal "is so inherently vague and indefinite that neither the stockholders voting on the proposal, nor the company in implementing the proposal (if adopted), would be able to determine with any reasonable certainty exactly what actions or measures the proposal requires."
Goldman may have a point. In its no-action letter to the SEC, the company presents a compelling argument that CtW's criteria for independence, as stated, could be interpreted in a number of different ways.
That said, it's important to remember that blocking the proposal isn't Goldman's only option, here. It could also work with the shareholder to reach a compromise or suggest changes to address the issues in the original proposal language.
The Foolish bottom line
It's also worth noting that CtW's proposal isn't the first of its kind that Goldman has fought. Just last year, Goldman agreed to create the lead director role in exchange for an agreement from the American Federation of State, County and Municipal Employees (AFSCME) to withdraw its proposal calling for the separation of the CEO and chairman roles. It has also resisted prior proposals calling for an independent chairman despite high levels of shareholder support. In fact, in its 2012 proxy statement, Goldman affirmed that average shareholder support for proposals calling for an independent chairman in the three prior years was about 32%.
And while Goldman points out that these shareholder proposals have been defeated in the past, proposals calling for an independent chairman have become more popular in recent years. Specifically, the number of shareholder proposals calling for an independent chairman more than doubled at Russell 3000 companies from 2011 to 2012, and the average support for these proposals increased from 33% to 36% over the same time period.
With this kind of shift in public opinion, it's not surprising that Goldman fears what may happen if shareholders have the opportunity to vote on the issue. But investors should ask themselves whether they want to own shares in a company that offers such a strong resistance to proposals that have such broad investor support.
With big finance firms still trading at deep discounts to their historic norms, investors everywhere are wondering if this is the new normal, or whether finance stocks are a screaming buy today. The answer depends on the company, so to help figure out whether Goldman Sachs is a buy today, I invite you to read our premium research report on the company. Click here now to keep reading.