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May 10, 2010
Goldman Sachs Annual Meeting a Success for Shareowner Advocacy
    by Robert Kropp

Several resolutions introduced by members of the Interfaith Center on Corporate Responsibility win significant shareowner support, and a resolution on say-on-pay is withdrawn.

Will the real Goldman Sachs annual meeting please stand up?

The impact on investors of the business operations of corporations has been receiving unprecedented attention lately, in the aftermath of charges by the Securities and Exchange Commission (SEC) that Goldman Sachs defrauded investors of more than $1 billion. Activist shareowners responded to concerns over corporate governance at the Wall Street firm by introducing five resolutions for its annual general meeting, held on May 7.

Because of the viral coverage of the SEC charges and the possibility of criminal charges against the firm to follow, coverage of Friday’s meeting was extensive as well. Describing the meeting as “relatively friendly,” the
New York Times reported that most shareowners “voted exactly as the bank’s board advised them to.”

In a second
article, the Times described a 19% shareowner vote in favor of a resolution calling for the separation of CEO and chair as an “overwhelming defeat” of the proposal.

In reality, a 19% shareowner vote in favor of a proposal is in fact a measure of considerable support. Because the majority of shareowners continue to vote with management as a matter of routine, the SEC has rules in place that allows for resolutions to be re-submitted the following year if they gain certain levels of shareowner support.

As the
Interfaith Center on Corporate Responsibility (ICCR)—whose members submitted five important resolutions at Goldman Sachs, including the separation of CEO and chair—described in its 2010 Proxy Voting Guide, “A resolution does not have to get 51% of the vote to win.”

The SEC gives “small shareholders a voice by requiring a fairly low threshold of support for a proposal to be resubmitted a second and third year,” the ICCR guide explained. “A proposal must get at least 3% of the vote in its first year; 6% of the vote in its second year; and 10% in its third year, and every year thereafter, to remain eligible.”

“This gives shareholder advocates the opportunity to mount multi-year education campaigns on proposals before a company,” according to the guide. By such established standards, the resolution calling for the separation of CEO and chair, submitted by the
Christian Brothers Investment Services (CBIS) and the Needmor Fund, in fact amounted to a resounding victory, one that informs Goldman Sachs that issue is not about to go away.

The resolution addressed the “potential conflict of interest for a CEO to be her/his own overseer while managing the business,” and referenced a
2009 report by the Millstein Center for Corporate Governance and Performance that stated, “Having an independent chairman is a means to ensure that the CEO is accountable for managing the company in close alignment with the interests of shareowners, while recognizing that managing the board is a separate and time intensive responsibility.”

The measure of shareowner dissatisfaction with the corporate governance practices of Goldman Sachs was even more clearly demonstrated in two other resolutions, each of which won about a third of the vote at the meeting.

resolution filed by the Maryknoll Sisters, calling for more disclosure on collateral in derivatives trading, won 33% of shareowner support. The same resolution won 39% of the vote at Bank of America, and a 30% vote in favor at Citigroup. The resolution is scheduled to be voted on by shareowners at the annual general meeting of JP Morgan Chase on May 18.

Leading up to the financial crisis, assets of the largest financial institutions were leveraged at the rate of over 30 to 1. The resolution requested that Goldman Sachs “ensure that the collateral is maintained in segregated accounts and is not rehypothecated.” Rehypothecation refers to the practice by financial institutions of taking in collateral as guarantees on derivatives trades, and then using it as collateral for their own transactions.

resolution filed by Domini Social Investments, requesting that Goldman Sachs report semi-annually on its political contributions and expenditures, won 31% of the shareowner vote.

Political contributions by corporations gained widespread attention earlier this year, when the US Supreme Court decision on the Citizens United case effectively eliminated most restraints on corporate political spending. Social investors and other shareowner activists responded quickly. Adam Kanzer, Managing Director and General Counsel of Domini, told at that time, “We’ve reached the point where going from company to company should give way to standards of disclosure to be adopted by every company.”

“Anyone can see that political spending represents a real reputational risk for companies,” Kanzer continued.

Another victory for activist shareowners can be found in the withdrawal of a resolution addressing executive compensation at the company. As the ICCR proxy guide states, “The goal in filing shareholder resolutions is not simply to gain the votes of shareholders but to change corporate policies. If this goal is achieved before the annual meeting, the filer may choose to withdraw the resolution.” The resolution sought the establishment of an independent panel to review the corporate compensation policies at Goldman Sachs.

As a recipient of TARP bailout funds, Goldman Sachs was required to allow a shareowner vote on executive compensation last year. This year, in the aftermath of widespread outrage over the firm’s hasty return to the practice of awarding outlandish bonuses, Goldman Sachs announced that it would allow for an annual vote on its compensation practices.

Even the 5.5% vote in favor of a
resolution addressing pay disparity at the firm can be considered a victory, inasmuch as it addresses fundamental disparities of corporate pay scales throughout the economy, and not only at large financial institutions where the awarding of annual bonuses often drive executive compensation levels to tens of millions of dollars. The resolution cited a 2008 piece in BusinessWeek, finding that in 2007, an S&P 500 CEO worked approximately 3 hours to earn what a minimum wage worker earned for the full year.

At the meeting, Lloyd Blankfein, CEO and chair of Goldman Sachs (he declined an invitation voiced at the meeting to resign from his role as chair), said, “We understand that there is a disconnect between how we as a firm view ourselves and how the broader public perceives our role and activities in the market. To address this, we need a rigorous self-examination.” If such words are to mean more than a public relations campaign (a lawsuit recently filed by an institutional investor noted with concern how quick Goldman Sachs was to describe the SEC charges as baseless), Blankfein would do well to consider the strong support for responsible corporate governance voiced by a significant number of shareowners.

Such a course would make this year’s annual meeting a resounding success, but for advocates of corporate social responsibility (CSR), and not for business as usual.


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