Goldman Sachs' Lloyd Blankfein: Still Chairman and CEO.
Corporate governance experts praise the decisions at Goldman Sachs and BATS Global Markets to alter their governance structures, but they say the changes won’t help either firm solve the deeper problems they face right now. At BATS, the Lenexa, Kan. electronic exchange where a software glitch suspended trading and botched its IPO on Friday, the firm is stripping CEO Joe Ratterman of the chairman’s job. Bloomberg is reporting that BATS won’t consider a new date for an IPO for at least a quarter. At Goldman Sachs, CEO Lloyd Blankfein is keeping his post as chairman, but the firm is appointing a “lead director” to its board, in response to pressure from a union pension fund that is a major Goldman shareholder. Lead directors don’t play the role of chairmen but they have no ties to the company and they work to represent the interests of fellow board members.
The Wall Street Journal reports today that Goldman’s decision came after months of talks with directors and executives, prompted by the American Federation of State, County and Municipal Employees, which had urged that the firm divide the chairman and CEO roles to help Goldman restore its reputation and reduce the chances for conflicts of interest. At one point, according to the Journal, Goldman officials considered making president Gary Cohn the firm’s chief executive and keeping Blankfein as chairman. Though Blankfein, who has been chairman and CEO since 2006, has said he would rather die at his desk than give up the CEO post, the Journal reports that Blankfein considered the move.
Both the BATS and Goldman decisions are part of a larger trend, to separate the job of CEO from that of chairman, says P. Espen Eckbo, director of the Lindenauer Center for Corporate Governance at Dartmouth’s Tuck business school. Eckbo points out that the U.S. lags the rest of the world in its tendency to combine the two jobs. In Sweden, for instance, it’s illegal for the CEO and the chairman to be the same person, and in the U.K., it is not done.
Since the board hires, fires and sets the compensation for the CEO, it’s an inherent conflict of interest for the CEO to chair the board, says Eckbo. “You want the board to be independent and ready to fire and change top management when they should,” he explains. “If the board is too close to the top management, they are more reluctant to undertake these fairly dramatic decisions.”
But Jeffrey Sonnenfeld, a professor at the Yale School of Management, points out that separating the CEO and chairman roles does not guarantee good corporate governance. Both Enron and WorldCom divided the roles, as did BP. “A separate chairmanship has never been a panacea,” says Sonnenfeld. “People have fallen into this checklist of easy structural interventions, but there’s no evidence they make things better.” Sonnenfeld says it’s the “culture” of the board and the “character of the people” that make the difference.
In the last 10 years, say Eckbo and James Shein, a professor at Northwestern University’s Kellogg School of Management, an increasing number of U.S. companies have been separating the two roles, or appointing a lead director, to operate as a check on the CEO’s power. When Congress passed the 2002 Sarbanes-Oxley Act, lawmakers were concerned about the conflicts of interest inherent in the combined CEO-chairman role, but they didn’t want to outlaw it. That prompted the rise of lead directors at a number of companies. The Wall Street Journal reports that the number of lead directors in S&P 500 companies rose to 247 in 2011 from 165 in 2006, according to executive search firm Spencer Stuart.
Along with the lead director trend, there has been a move among U.S. companies to separate the CEO and chairman roles. Shein says a watershed came when Disney CEO Michael Eisner was voted out as chairman in 2004, as the company struggled with problems in its ABC television and theme park businesses. In 2009, shareholders at Bank of America voted to bar the same person from being chairman and CEO, forcing Kenneth D. Lewis to step down as chairman. He resigned the CEO post eight months later.
The Wall Street Journal reports that AFSCME has been pressuring nine other companies where it owns shares, to split the CEO and chairman roles. The companies include J.P. Morgan Chase, American Express and Northern Trust.
Still, many U.S. companies continue to combine the two roles. At Goldman, the matter remains on the table, according to Reuters, despite AFSCME’s decision to withdraw its shareholder proposal. The lead director decision “certainly doesn’t go as far as we wanted,” Lisa Lindsley, director of capital strategies for AFSCME's pension plan, told Reuters. A source “familiar with management thinking” told Reuters that the proposal to split the chairman and CEO roles could be discussed as early as this week, at a board meeting in India, where Blankfein could be asked to explain incidents where Goldman has been criticized for conflicts of interest, including a Delaware chancery court’s ruling four weeks ago that said the firm had multiple conflicts in Kinder Morgan’s $21.1 billion takeover of El Paso Corporation and a scathing New York Times op ed by executive director Greg Smith, who said he was resigning because the firm callously talked about ripping off its clients.
Despite the pressure, it’s doubtful Blankfein will step down from either role. AFSCME’s Lindsley told Reuters that it was tough to convince Goldman to agree to install a lead director. AFSCME tried to get the firm to agree to splitting the role when a successor takes over from Blankfein but Goldman resisted. “The person who's in that job wants to retain those jobs and if he gives up either one it looks like a demotion,” Lindsley told Reuters.
