Goldman Sachs Director Johnson Opposed by Buffett-Linked Fund
James A. Johnson, the longest- serving member of Goldman Sachs Group Inc. (GS)’s board, is being opposed for re-election by a fund management company that boasts long-time links with billionaire Warren Buffett.
Ruane, Cunniff & Goldfarb Inc., the New York firm that helps oversee $15 billion, including the $5.7 billion Sequoia Fund Inc. (SEQUX), criticized Johnson’s role in “egregious corporate governance debacles” in a letter on its website yesterday and said it would also oppose Johnson if he stands for re-election to the board of Target Inc. (TGT) The Financial Times reported on the letter’s contents earlier today.
“We believe that Mr. Johnson’s history should disqualify him for service on the board of any public company,” Chief Executive Officer Robert D. Goldfarb and President David M. Poppe, co-managers of the Sequoia Fund, wrote in the letter to clients. “We respectfully ask that you vote your Goldman Sachs proxy against him.”
Johnson, 68, has been chairman of the compensation committee at Goldman Sachs since it became a public company in 1999. Ruane, Cunniff has managed 1.4 million Goldman Sachs shares since April 2010, including 435,000 held in the Sequoia Fund. The board of Goldman Sachs, the fifth-biggest U.S. bank by assets, has recommended that shareholders re-elect Johnson, David Wells, a company spokesman, said in an e-mailed statement.
“He has served them well since 1999 and will continue to do so,” Wells said. Johnson didn’t immediately reply to a phone message left at his office in Washington.
The public rebuke by an investor comes in the same week that a majority of shareholders of Citigroup Inc. (C), the third- biggest U.S. bank by assets, voted against a compensation plan for executives including CEO Vikram Pandit.
Sequoia Fund was co-founded in 1970 by Richard Cunniff and William Ruane, a friend of Berkshire Hathaway Inc. (BRK/A) CEO Buffett since both studied under value investor Benjamin Graham at Columbia University. When Buffett shut down his investment partnership in 1969 to concentrate on Berkshire Hathaway, he recommended that his clients invest with Ruane.
Buffett, who disclosed earlier this week that he is being treated for prostate cancer, last year redeemed his $5 billion preferred-stock investment in Goldman Sachs that was made at the depths of the financial crisis. He continues to hold warrants on the stock and has been a supporter of Goldman Sachs Chairman and CEO Lloyd C. Blankfein, 57.
Sequoia Fund, which reopened to new investors in 2008 after having been closed to outside money for 26 years, disclosed in a regulatory filing in January that it was limiting new investment through financial advisers and intermediaries. It said it would continue to sell shares directly to investors.
Sequoia generated a 13.2 percent return last year, outperforming 99 percent of its peers as well as the 2.1 percent gain that the S&P 500 index recorded when dividends are included, according to data compiled by Bloomberg. The fund had a total return of 19.5 percent in 2010, a performance that led Chicago-based Morningstar Inc. to designate Goldfarb and Poppe as its domestic stock fund managers of the year.
Ruane, Cunniff voted against Johnson’s re-election to the Goldman Sachs board and the Target board last year, according to a person with knowledge of the matter, who asked not to be identified because the fund doesn’t disclose how it votes.
From 1991 until 1998, Johnson was chairman and CEO of mortgage-finance company Fannie Mae, which was taken under government protection in 2008. His tenure at Fannie Mae was a central theme of the book “Reckless Endangerment: How Outsized Ambition, Greed and Corruption Led to Economic Armageddon” by Gretchen Morgenson and Joshua Rosner that was published last year.
In their April 18 letter to investors, Goldfarb and Poppe wrote that Fannie Mae used its status as a government-sponsored entity to borrow money cheaply and “dramatically expanded its portfolio of retained mortgages” during the 1990s.
“Rather than act conservatively to protect taxpayers, during Johnson’s tenure Fannie ramped up its growth by buying lower-quality mortgages,” according to the letter. “This bloated Fannie’s balance sheet, increased its profit and magnified the risk to taxpayers.”
The letter also cites Johnson’s tenures on the boards of Minnetonka, Minnesota-based UnitedHealth Group Inc. (UNH), the biggest U.S. health insurer, and Los Angeles-based homebuilder KB Home (KBH), which both had to restate earnings after backdating option grants to their CEOs.
Goldfarb and Poppe also cite media reports from 2008 that said Johnson may have received below-market rates on home loans from Countrywide Financial, which sold loans to Fannie Mae.
Following a June 7, 2008, report in the Wall Street Journal, Johnson quit then-Senator Barack Obama’s vice-presidential search committee to avoid distracting attention from Obama’s candidacy and said that “blatantly false statements and misrepresentations” were written about him.
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