Blankfein Meets Shareholders Suffering Goldman Integrity Crisis

Lloyd C. Blankfein, CEO of Goldman Sachs Group Inc.
Lloyd C. Blankfein, chairman and chief executive officer of Goldman Sachs Group Inc., chats with other attendees prior to a speech by U.S. President Barack Obama speech about financial reform at Cooper Union in New York on April 22, 2010. Photographer: Daniel Acker/Bloomberg

Lloyd Blankfein, Goldman Sachs Group Inc.’s chief executive officer, faces another test of his leadership this week when he addresses the firm’s annual shareholder meeting 10 days after a showdown with U.S. senators.

Investors are eager to hear how Blankfein plans to repair the New York-based firm’s reputation, tarnished by a fraud lawsuit filed last month by the U.S. Securities and Exchange Commission, federal prosecutors’ scrutiny of the firm’s mortgage business and the release of e-mails that show Goldman Sachs employees disparaging securities they were offering to clients.

“Their reputation is suffering,” said Julie Tanner, assistant director of socially responsible investing at Christian Brothers Investment Services Inc. in New York, which manages $3.8 billion and has owned Goldman Sachs stock since 2000. “They need to take some significant steps to stem the tide of what is happening right now and try to reposition themselves.”

Shareholders will expect to hear what some of those steps might be when they gather for the firm’s annual meeting in New York on May 7, said Eleanor Bloxham, president of the Corporate Governance Alliance in Columbus, Ohio.

“They need to be able to address what they’re going to do from the board all the way on down through the organization and not just say we’re looking at our business practices,” Bloxham said. “I don’t think that will be enough.”

Stock Plunge

Blankfein, 55, led the firm to record earnings last year, and the company reported its second-best quarterly profit in the first three months of this year. Still, the stock plunged 13 percent after the SEC filed its suit on April 16, making Goldman Sachs the only one of the six biggest U.S. banks whose shares lost value this year.

News that U.S. prosecutors began a criminal investigation of the firm led the stock to fall 9.4 percent on April 30. Guy Moszkowski, an analyst at Bank of America Corp., cut his rating on the company that day to “neutral,” saying “it is very difficult to see the shares making further progress until the matter has been resolved.”

Since the SEC announced its case, which Goldman Sachs said was “completely unfounded,” the stock has fallen 21 percent, wiping out more than $21 billion of market valuation.

SEC Case

The SEC suit accuses Goldman Sachs and an employee, Fabrice Tourre, of misleading investors in a mortgage-linked security about the role that a hedge fund, Paulson & Co., played in both selecting and betting against the obligation.

Eleven days after the case was filed, Goldman Sachs executives, including Blankfein and Tourre, 31, endured almost 11 hours of questioning and castigation by the U.S. Senate’s Permanent Subcommittee on Investigations. The committee released e-mails that showed Goldman Sachs employees referring to securities created by the firm as “shi**y” and “junk.”

Goldman Sachs’s reputation has suffered because the firm hasn’t talked enough about how industry practices need to change going forward, said Ben W. Heineman Jr., a former senior vice president for law and public affairs at General Electric Co. and author of the book “High Performance With High Integrity.”

“It’s like a stock-market chart in terms of their reputation, it’s pretty much been straight down,” Heineman said. “They have been too defensive and negative and have not talked enough about the changed world and what is the right thing to do.”

‘Molecular Level’

Blankfein promised after the Senate hearing on April 27 that he will re-examine the firm’s practices and work to better explain Goldman Sachs’s business to the public.

“On a molecular level, we’re going to be going through everything we do,” Blankfein said in an interview with Bloomberg Television.

Goldman Sachs spokesman Lucas van Praag declined to comment about the shareholder meeting. He said the firm is considering ways to make sure that it meets the demands of regulators.

“We review our business practices all the time,” van Praag said. “When we help clients structure transactions we need to be even more focused on ensuring that they understand the potential risks and the potential consequences of subsequent events.”

In the days after the hearing, Blankfein gave interviews to National Public Radio, CNN and television talk-show host Charlie Rose. He has emphasized that the firm needs to make its business more transparent so that the public, politicians and regulators better understand what it does.

Repairing Reputation

“We have to do a better job of being transparent and examining our processes to make sure that the society is in tune to the way in which we’re making our decisions,” Blankfein said on the “Charlie Rose” show on April 30. “This is a big preoccupation for me and a big preoccupation for our management group.”

The challenge the firm faces, Blankfein said, is to “repair” its reputation and to do it “without the contact with the American public to build on” because Goldman Sachs doesn’t have a consumer business.

That effort doesn’t include inviting stockholders to its new $2.1 billion headquarters near Battery Park. Instead, the firm is holding its shareholder meeting across lower Manhattan in a building that once housed its asset-management division. Michael DuVally, a spokesman in New York, declined to comment on why the meeting isn’t in the new building.

Blankfein also has to maintain the support of the firm’s most senior employees, its partners, who share in a special pool of compensation. Highest-ranking among them are the 30 members of the management committee who oversee all of the company’s global activities. More than half of them, including Blankfein, have served on the committee since before Blankfein became CEO in June 2006.

Blankfein’s Message

After his testimony in Washington on April 27, Blankfein left a voicemail for Goldman Sachs’s 33,100 employees urging them to remain focused on their jobs.

“I hope we made clear the confidence we have in all of you -- the people of Goldman Sachs -- especially your commitment to integrity, and your service to your clients,” he said.

Investors led by Tanner proposed a vote at the meeting to separate the roles of chairman and CEO, both held by Blankfein since he succeeded Henry Paulson. Although the proposal was submitted before the filing deadline in December, Tanner said recent events make the change more urgent.

“The company didn’t even agree to analyze the issue,” Tanner said. “They seem committed to the structure that currently exists, but I would hold that that structure is not working effectively.”

Stockholder Support

Shareholders who support Blankfein say they’re sanguine about the company. David Killian, a portfolio manager at Sterling Asset Management LLC in King of Prussia, Pennsylvania, who oversees $700 million including Goldman Sachs shares and bonds, said Blankfein and the firm have already done enough explaining to the politicians, the public and the regulators. He said he expects the reputational concerns to evaporate.

“It will pass,” Killian said. “The markets tend to have short-term memory. I’m fairly comfortable with the job they’ve done up until this point. They’ve come upon a rough patch here, which they’ll get through.”

Goldman Sachs’s most high-profile investor, Berkshire Hathaway Inc., is also sticking by the company and its management team, said Warren Buffett, Berkshire’s billionaire chairman and CEO. Buffett invested $5 billion in Goldman Sachs preferred stock in September 2008 after Lehman Brothers Holdings Inc. went bankrupt.

“He’s done a great job running that firm,” Buffett said in a May 1 Bloomberg Television interview before Berkshire’s annual shareholders meeting in Omaha, Nebraska. He said he supports Blankfein “100 percent.”

Say on Pay

Unlike other shareholders, Buffett gets a 10 percent dividend or $500 million a year on his preferred stock and also received warrants to buy $5 billion of shares at $115 each for five years. The stock closed April 30 at $145.20.

Shareholders, who were content to cast their votes with management when times were good, have become more restive since the financial crisis started in 2007. Three of Goldman Sachs’s U.S. competitors -- Bank of America, Citigroup Inc. and Morgan Stanley -- have split the chairman and CEO roles in the last three years.

Even Goldman Sachs shareholders overruled the board of directors last year for the first time since the company went public by backing a proposal that allows a simple majority of shareholders to enact changes at the company, instead of 80 percent. At this year’s meeting, the board is backing a change to the company’s charter to implement that change.

Goldman Sachs is also giving shareholders a non-binding advisory vote on the firm’s compensation, a so-called say on pay, after opposing allowing such a vote in previous years.

‘Starting to Wake Up’

Shareholders are “starting to wake up and realize that they need to get involved,” Bloxham of the Corporate Governance Alliance said. “When everything was going up and up, shareholders sat back, but there is enough concern around Goldman and what other shoes may drop that I think that’s going to set the tone.”

The American Federation of State, County and Municipal Employees, the largest U.S. union for public employees and health-care workers, advised its members to withhold their votes to re-elect Blankfein and President Gary Cohn, 49, to the board.

Two other Goldman Sachs board members have also been in the spotlight. Rajat Gupta, the former McKinsey & Co. senior partner who isn’t running for re-election, is suspected by U.S. investigators of tipping off Galleon Group LLC founder Raj Rajaratnam ahead of Buffett’s investment in the company, a person with direct knowledge of the inquiry said last month. Gupta hasn’t been accused of any wrongdoing, and his lawyer, Gary Naftalis of Kramer, Levin, Naftalis & Frankel LLP, said Gupta hadn’t violated any law or done anything improper.

‘God’s Work’

Stephen Friedman, a former senior partner of Goldman Sachs who has served on the board since 2005, resigned as chairman of the Federal Reserve Bank of New York last year to avoid the appearance of a conflict of interest because Goldman Sachs is regulated by the Fed. The House Oversight and Government Reform Committee said it plans hearings about why Friedman was allowed to buy Goldman Sachs stock even when he was playing a role in regulating it. At last year’s shareholder meeting, Blankfein defended Friedman, calling him “a credit to our board.”

Blankfein’s flippant remark to a British journalist last year that he was doing “God’s work” may backfire at this year’s meeting as three of the seven shareholder proposals came from religious organizations such as the Maryknoll Sisters of St. Dominic, a Catholic missionary order based in Maryknoll, New York. Goldman Sachs’s board has opposed all of the proposals.

Betting on Blankfein

Intrade, an online Dublin-based betting site, started making a market last week on whether Blankfein will depart as CEO before the end of the year. As of yesterday, the market was assigning a 25 percent probability to the likelihood of that happening.

“They have to show accountability to shareholders,” Tanner said. “They need to show that there are changes that are going to be taking place. There’s obviously some disconnect between what is happening at the company and what is public perception.”

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