Goldman Sachs (GS): Vote for Proxy Access

Goldman Sachs ($GS) is one of the stocks in my portfolio. Their annual meeting is coming up on 5/23/2013. had collected the votes of two funds when I checked on 5/15/2013. I’ll check back and may post again on GS before the voting deadline, depending on developments. I voted with management 26% of the time.  View Proxy Statement. Warning: Be sure to vote each item on the proxy. Any items left blank are voted in favor of management’s recommendations. (See Broken Windows & Proxy Vote Rigging – Both Invite More Serious Crime)

I generally vote against pay packages where NEOs were paid above median in the previous year but make exceptions if warranted. According to Bebchuk, Lucian A. and Grinstein, Yaniv (The Growth of Executive Pay), aggregate compensation by public companies to NEOs increased from 5 percent of earnings in 1993-1995 to about 10 percent in 2001-2003. Few firms admit to having average executives. They generally set compensation at above average for their “peer group,” which is often chosen aspirationally. While the “Lake Woebegone effect” may be nice in fictional towns, “where all the children are above average,” it doesn’t work well for society to have all CEOs considered above average, with their collective pay spiraling out of control. We need to slow the pace of money going to the 1% if our economy is not to become third world.

GS’s Summary Compensation Table shows Lloyd C. Blankfein, CEO and Board Chairman, was the highest paid named executive officer (NEO) at about $13.3M in 2012. I’m using Yahoo! Finance to determine market cap ($74B) and Wikipedia’s rule of thumb regarding classification. GS is a large-cap company. According to the United States Proxy Exchange (USPX) guidelines (pages 9 & 10), using data from Equilar, the median CEO compensation at small-cap corporations was $10.8 million in 2010.

GS’s pay, while falling from prior years, is still above median, even when factored for inflation and is not adequately linked to performance.  Glass Lewis is also recommending against the pay package, citing several incidents that brought into question compensation chair, James Johnson’s credentials, and his leadership of the compensation committee. (Goldman Sachs ‘Failed To Link Pay With Performance’: Glass Lewis, Reuters, 5/13/2013.

Johnson had been CEO and chairman of Fannie Mae in the 1990s, when the company failed to recognize $200 million in expenses. That boosted Fannie’s profits in a way that allowed executives to meet targets for maximum bonus payouts, including $1.9 million that Johnson received, Glass Lewis said.

Johnson also participated in Countrywide Financial’s “VIP” mortgage program that gave favorable loan terms to Washington insiders, and was a director of two companies whose CEOs illegally backdated stock options, Glass Lewis said.

“We believe shareholders would be better served by a director above reproach who will not subject the company to further criticism,” Glass Lewis concluded.

Therefore, I voted against the pay package, the stock and, unlike Glass Lewis, against the entire compensation committee, since it wan’t just Johnson’s decision: James A. Johnson, M. Michele Burns, Claes Dahlbäck, Stephen Friedman, William W. George, Lakshmi N. Mittal, Adebayo O. Ogunlesi, James J. Schiro, Debora L. Spar, and Mark E. Tucker.

I voted for the shareowner proposal by Jing Zhao to establish a Human Rights Committee reporting to the Board. Although Zhao’s proposal is worded somewhat like a personal grievance, the “Resolved” clause make every bit of sense, especially for a company facing reputational problems like GS.

I also voted in favor of the Needmor Fund’s shareowner proposal to prepare a report disclosing direct and indirect lobbying expenditures. I would like to be able to monitor these important expenses, which present such a reputational risk for our company.

Taking the next proposal out of order: While sympathetic to Eric M. Fogel arguments regarding mismanagement, I voted against his shareowner proposal to

engage the services of an investment banking firm to evaluate alternatives that could enhance shareholder value including, but not limited to, a merger or outright sale of the Company… on terms that will maximize share value for shareholders.

This seems like to drastic a step. Certainly, GS has been the target of numerous investigations, enforcement actions and private litigation related to various aspects of its business, including mortgage lending, underwriting and disclosure practices. Governance flaws in key areas, including executive compensation, combined with the financial and reputational risks created by Goldman’s business practices, create substantial ESG risks. However, I don’t believe our Company is beyond redemption.

Of course, I also voted for my own proposal to provide proxy access. The proposal presents two optional routes for shareowners seeking to place director nominees on GS’s proxy:

a. Any party of one or more shareowners that has collectively held, continuously for two years, at least one percent but less than five percent of the Company’s securities eligible to vote for the election of directors, and/or

b. Any party of shareowners of whom 50 or more have each held continuously for one year a number of shares of the Company’s stock that, at some point within the preceding 60 days, was worth at least $2,000 and collectively at least one half of one percent but less than five percent of the Company’s securities eligible to vote for the election of directors.

Both parties are limited to nominating 24% of the board, each so in the case of GS that would be 2 out of 12. Unique to this form of proxy access proposal, no party can overlap or use both options. If two shareowner nominating parties arose, invoking both options then 4 directors out of 12 could possibly be replaced.

That might be considered “substantial change,” but not in the conventional sense, since neither party comes close to “control” with 2 out of 12 directors, which I might add is also the number of women on our Board. We are hoping to create a new model of corporate governance where no one party “controls” the corporation. Such a multiparty structure will increase the likelihood that corporations are presented with alternatives… not just the company’s Plan A, or a challengers Plan B but also maybe a Plan C.

Corporate elections are just beginning a transition from contests among oligarchies to something more akin to democracy. The idea of multi-party elections may seem novel or foreign to the corporate governance industrial complex that has grown accustom to contests in which one side or the other is awarded with a victory, not much different than the spoils of war. We believe such multi-party monitoring will lead to less focus plundering by those in control and more on growing the business through sustainable long-term methods.

With regard to why GS was chosen as a specific target for proxy access: Our company’s stock price was flat or declined over the last two year and five year periods. Our CEO chairs the board. A June 2012 GMI Ratings report found that companies with a separate CEO and chair provide investors with five-year shareowner returns nearly 28% higher than those with combined roles.

Looking at, the board is authorized to increase or decrease the size of the board without shareowner approval. No action can be taken without a meeting by written consent. Special meetings can only be called by shareholders holding not less than 25% of the voting power.

Unlike most US companies, all non-executive directors are also members of the board’s four key standing committees. Such unusual setup can potentially keep directors from acquiring expertise in specific areas (audit, risk, compensation, corporate governance), and it can certainly dilute the sense of responsibility directors on those committees feel for their committees’ work. It is time we allowed shareowners to nominate conscientious independent directors who will move our company forward.

Similarly, ISS also rates GS as risky, especially with regard to audits. The Goldman Sachs Group, Inc.’s ISS Governance QuickScore as of May 1, 2013 is 5. The pillar scores are Audit: 10; Board: 7; Shareholder Rights: 4; Compensation: 6.Institutional Shareholder Services (ISS). Scores range from “1” (low governance risk) to “10” (higher governance risk). Each of the pillar scores for Audit, Board, Shareholder Rights and Compensation, are based on specific company disclosure. I would argue that such a poor score for audit is bet good, especially for a bank.

In their opposition statement of my proxy access proposal, unnamed agents of our Company state:

The proposal’s thresholds of 1% ownership for two years or 0.5% ownership for one year are unreasonably low. Also, the proposal disfavors shareholders who own more meaningful amounts of stock, specifically by excluding 5% or greater shareholders. It seems inequitable that shareholders with more of an economic interest in a company would be denied a right provided to shareholders with significantly less holdings… This could result in the election of “special interest directors”.

Unnamed agents of our Company allege that under my proposal, shareowners with an “unreasonably low” ownership” would be eligible to make nominations using the Company’s proxy materials. Since when is $370 million “unreasonably low”? I don’t think it would be considered such by most people. Unnamed agents of our Company appear to believe a ragged group of 50 shareowners, holding an average of $7.4 million each in GS stock, “could lead to the election of ‘special interest directors.'”

Yet, they fail to explain how ‘special interest directors” would win. It certainly wouldn’t be as a result of the votes of the 1% or 1/2% nominating. Insiders own more than 7% of our Company. The top ten institutional investors, such as Vanguard, Capital Research & Management, SSgA Funds, and BlackRock own 29% of outstanding shares. Institutional investors own about 74% of our Company. Why would such investors elect “special interest directors”? Obviously, they would seek to elect the best directors to serve the interests of their clients, the ultimate shareowners… hardly a special interest.

Regarding the allegation that it “seems inequitable that shareholders with more of an economic interest in a company would be denied a right provided to shareholders with significantly less holdings” by excluding 5% or greater shareholders from proxy access, it is our belief that such large shareowners would go through the normal proxy solicitation process because they would want to fight a typical contest to gain “control” of our company. In such a fight, I would expect them to offer the normal control premium. No, our proxy access proposal isn’t about hostile takeovers involving control, but instead democratic elections and accountability.

How I voted (CorpGov) below:

1Elect Director Lloyd C. BlankfeinForForAgainst
2Elect Director M. Michele BurnsAgainstForFor
3Elect Director Gary D. CohnForForFor
4Elect Director Claes DahlbackAgainstForFor
5Elect Director William W. GeorgeAgainstForFor
6Elect Director James A. JohnsonAgainstForFor
7Elect Director Lakshmi N. MittalAgainstForFor
8Elect Director Adebayo O. OgunlesiAgainstForFor
9Elect Director James J. SchiroAgainstForFor
10Elect Director Debora L. SparAgainstForFor
11Elect Director Mark E. TuckerAgainstForFor
12Elect Director David A. ViniarForForFor
13Ratify NEO CompensationAgainstAgainstFor
14Approve Omnibus Stock PlanAgainstAgainstAgainst
15Ratify AuditorsForForAgainst
16Establish Board Committee on Human RightsForForFor
17Report on Lobbying Payments and PolicyForForFor
18Adopt Proxy Access RightForAgainstFor
19Explore Alternatives to Maximize Shareholder ValueAgainstAgainstAgainst

Mark your calendar:

Pursuant to Rule 14a-8 promulgated under the Exchange Act, in order to be included in the Proxy Statement and form of proxy relating to our 2014 Annual Meeting, we must receive any proposals of stockholders intended to be presented at the meeting no later than December 12, 2013. In addition, any proposals must comply with the other requirements of Rule 14a-8.

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