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Tuesday, 02 March 2010 04:59

The Tyranny of the Oversized CEO Bonus: Goldman Sachs' Shareholder Smackdown Shows Senate Must Act Now on Financial Reform

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by Meg White

Imagine this: At the end of 2009 -- one of the bleakest years in recent financial memory -- you went to your boss' office, grabbed the company's checkbook and wrote yourself a bonus check.

Your boss says, "Hey! That's way bigger than the bonus I was gonna give you!"

Your reply?

"Tough cookies, sir."

Damn, it must be good to be Goldman Sachs.

The Associated Press reported yesterday that Goldman Sachs' board announced that it will not heed the calls of shareholders demanding an internal review of the company's financial compensation packages. In a filing with the Security and Exchange Commission, the financial institution brushed off the shareholders' suggestion that executive compensation was too high in 2009, adding that it would not consider reforming its pay structure.

If the initial analogy doesn't ring true to you, consider the traditional role of the corporate shareholder. They're generally construed to be the "employers" of a company's corporate management, as well as a company's conscience. Therefore, it makes sense that shareholders' views should be taken into account when it comes to internal price-setting, including compensation determination.

That is, it makes sense to me. But then, I don't own a leading global financial services firm, so what do I know?

If the recent lawsuits and requests for internal review from Goldman's shareholders are any indication, these investors are interested in exercising such restraints. And, taking into account Goldman's reaction, I think we can say fairly that they might need some outside encouragement to listen to their shareholders.

There are many, many financial reforms that Congress needs to enact, and it (by that I mean mostly the slow-moving Senate) must do so quickly and forcefully. Of course, it clearly isn't doing so.

Much of the opposition seems to be concentrated on the notion that American financial success should be determined by the marketplace. While the market has shown itself to be a terrible regulator in the recent past, I respect the consistency of those who tout its virtues in this arena.

And that is why there is no excuse but to pass the Corporate and Financial Institution Compensation Fairness Act in the Senate. Rather than relying on the government to set compensation rates to CEOs of bailed-out companies, this legislation would give shareholders a voice in determining CEO pay. Rep. Barney Frank (I-VT) introduced the bill as H.R. 3269, and it passed out of the House last summer by a vote of 237-185.

While conservative financial commentators trot out consultants who warn of unnamed "loopholes" and "unintended consequences" that would supposedly arise as a consequence of this legislation, a good reason to oppose the bill appears difficult to conjure (one source in the Forbes article says in one breath that the bill will have no effect and is "redundant," while in the next breath promising that it "would paralyze any firm").

Unless, of course, you object to its toothlessness. The shareholder vote would be nonbinding, so that Goldman, for example, could continue to ignore shareholder wishes. This is clearly a problem when we're dealing with headstrong companies like Goldman, which appear to subscribe to the notion that they should be able to run the entire economy without intervention.

Still, I'm guessing the rebuffed shareholders at Goldman would prefer another tool besides the lawsuits they've filed in New York and Delaware regarding executive bonuses. But the bill does make some important changes to the disclosure of incentives-based compensation, which could provide for a shame factor (assuming these CEOs still have access to that emotion). Also, the bill directs the Government Accountability Office to examine the correlation between compensation structure and excessive risk-taking, a study that could help us avoid the next crisis.

To make this abundantly clear, there is much more the Senate needs to do to shore up financial regulation in this country. The scary part is that they haven't even moved on the easiest-to-sell part of financial reform (aside from credit card reform, which they apparently couldn't even do without a ridiculous hand-out to the National Rifle Association).

Perhaps the most vilified entity in American finance these days (besides those who packaged and traded worthless mortgages on the derivatives market) is the CEO who grants himself an oversized bonus check or golden parachute. And the Senate can't even agree what to do with him.

While the American people who don't attend tea party rallies may be fine with the government capping such pay (at least for recipients of bailout money), some may object to a government takeover of executive compensation. OK, then. Let's let the shareholders do it. That's a market-based reform that makes sense.

Yet the Senate can't -- or won't -- pass Frank's bill. And that, in the end, may be the main element to Goldman's ballsy move yesterday to ignore its shareholders. If the most publicly popular limit to corporate power can't even make it through the Senate, Goldman has nothing to fear. Not only is there a total lack of a binding shareholder vote on executive compensation, but more importantly there's the utter lack of a political will to act on any financial reform at all.

After all, why not just smash and grab, if the store keeper will just shrug it off anyway?