Goldman board deal: Great for Blankfein, no one else

March 29, 2012: 11:39 AM ET

The fine print of Goldman's agreement with shareholder AFSCME places weak independent board members even more under the thumb of CEO Lloyd Blankfein.

By Eleanor Bloxham, CEO of The Value Alliance and Corporate Governance Alliance

Lloyd Blankfein

Goldman Sachs CEO Lloyd Blankfein

FORTUNE -- Deal making runs deep in the veins of Goldman Sachs -- and they are good at it. But one recent transaction which will be in play as the board meets in India today isn't a good deal for everyone: governance at Goldman just got worse.

For its part, the bank seems to be pleased with its side of the bargain with the American Federation of State, County and Municipal Employees pension fund. The agreement eliminates an AFSCME proposal, which would have given shareholders a vote on whether Goldman's CEO and chair roles should be split. Both the bank's 2011 and 2012 corporate governance guidelines say the board will "review its leadership structure at least annually" and the board will consider "the views of the Company's shareholders" in making that decision. But spokesperson David Wells suggests the bank is happy to have dodged a shareholder vote on this topic this year: "We appreciated the constructive talks with AFSCME," he says.

In exchange for the withdrawal of the proposal, Goldman (GS) agreed to change the title of its chair of the corporate governance and nominating committee from "presiding director" to "lead director" and add a few additional responsibilities to the role.

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Lisa Lindsley, director of capital markets strategies at AFSCME's pension plan says she was "happy with [the compromise] as an interim step but not as an ultimate board structure." "We want to see an independent chair," she told me. "This board has some serious governance issues. A board member [allegedly] doing insider trading during a board meeting? And he was an independent director."

Lindsley says the pension fund had decided to reach the agreement with Goldman because they wanted to "be reasonable, reframe their relationship and be more constructive." She says the bank had agreed to be more open to conversation but no schedule has been set for what she hopes will be ongoing dialogue on governance issues with the firm.

Unfortunately, the fine print of the current agreement is much worse than a disappointing interim step. It places weak independent board members even more under the thumb of CEO Lloyd Blankfein.

Sarbanes-Oxley mandated that public companies hold executive sessions in which a company's independent directors meet with no member of management present, which independent directors universally applaud. Independent directors should control those sessions, the content, and the timing. JP Morgan (JPM), in its guidelines, rightly describes how executive sessions should operate. "The independent directors will generally meet in executive session as part of each regularly scheduled board meeting... These sessions will provide the opportunity for discussion of such other topics as the independent directors may find appropriate." In this case, I would approve Goldman's copying off JPMorgan's paper.

But under the new plan -- not in place until this month -- Blankfein will get to shape the agenda for those sessions. Through the new lead director, the CEO will be asked "to identify matters for discussion at executive sessions of the independent directors," the new guidelines state.

Goldman's new scheme calls into question the true independence of the lead director. "The independent directors have currently determined that the chairperson of the corporate governance and nominating committee shall be the lead director." But the board chooses committee chairs "taking into account the views of the Chairman," Lloyd Blankfein.

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And the lead director, under the new guidelines, will be "reporting to the Chairman and CEO any views, concerns and issues of the independent directors." A blanket requirement to report is not in the best interest of the board's independence and may, in fact, stifle rather than foster good communication among the independent members. The lead director should not be making such a report unless the independent directors agree. There could very well be sensitive matters that the independent directors may wish to form an opinion on before they discuss them with the CEO -- and the independent members at least should have the opportunity to weigh those options.

Under Goldman's new plan, the lead director is also now responsible for leading the annual CEO evaluation. But again, it's unclear how independent this person will be.

The behind-the-scenes agreement with Goldman is part of a trend. U.S. shareholders have been more active than ever in conversations with companies this year. In part, this is because "say on pay" votes and proxy access measures have created openings for new dialogue -- and in part, because U.S. shareholders are just more comfortable with the process now. As engagement increases, there are bound to be experiments that fail. Lindsley says there had been no "high level" dialogue with Goldman "prior to the filing of [AFSCME's] proposal" and "none had been attempted."

U.S. shareholders should consider carefully who they are willing to negotiate with and when negotiations are appropriate. In discussions about this particular proposal, AFSCME negotiated with John Rogers, a member of Goldman's management, whom Lindsley says was "reasonable". Based on the outcome, both shareholders and independent directors might have achieved a better deal if they had been the ones at the table.

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U.S. shareholders must also be careful to weigh the serious downsides of appeasement with the joy of minor victories. It is easy to be swayed by personalities.

Given the large number of companies that have split the CEO and chair roles, the AFSCME proposal was not far-fetched. Given the state of Goldman's governance, it should have been a lay-up. Let's hope, for everyone's sake, the next deal Goldman cuts will benefit someone other than its CEO.

Eleanor Bloxham is CEO of The Value Alliance and Corporate Governance Alliance (, a board advisory firm.

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Eleanor Bloxham
Eleanor Bloxham
Contributor, Fortune

Eleanor Bloxham, an authority on governance and valuation, is CEO of The Value Alliance and Corporate Governance Alliance, an independent board and executive educational and advisory firm she founded in 1999. She is author of the books Value Led Organizations and Economic Value Management: Applications and Techniques, and publisher of the Corporate Governance Alliance Digest and her blog The Bloxham Voice.

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