Goldman board muppet of the day, James Johnson edition

By Felix Salmon
April 19, 2012

There’s one corporate-governance metric which isn’t looked at nearly enough, and that’s director pay. Reading the compelling broadside that Ruane, Cunniff & Goldfarb, who manage the Sequoia Fund, has launched against James Johnson, who’s running for re-election to Goldman’s board, I was glad to be reminded of the governance fiasco he oversaw at Fannie Mae, and I was shocked to learn of his involvement in an options-backdating scandal at United Healthcare. But absent from the letter, and present only in Shahien Nasiripour’s report about it, is the fact that Goldman paid Johnson $523,000 last year.

People respond to incentives, and it’s pretty self-evident that the more directors are paid, the more captured they are by management. After all, director pay isn’t set by shareholders. Michele Leder put it well back in 2009:

“Let’s face facts,” said Michelle Leder, the editor of, a corporate watchdog web site. “If you had a part-time job that was paying you $300,000, $400,000, $500,000 a year, and you didn’t have a lot of work to do, would you rock that boat? That’s just human nature.”

Goldman hasn’t had much luck with its board, which has been a distraction at best and an outright hindrance at worst since the crisis broke. And one of the reasons is surely that Goldman’s board members are expected to be seen and not heard: they’re flown around the world in luxury, and paid enormous sums of money, to provide the thinnest possible veneer of shareholder oversight. What do you think the chances are that Lloyd Blankfein thinks he has anything at all to learn from his board of directors?

The best form of board remuneration is that seen at Berkshire Hathaway, where directors are paid a modest four-figure sum and aren’t even covered by D&O insurance. I can see why Goldman might find it difficult to recruit qualified directors if it were to offer that package. But Goldman’s shareholders don’t want to be represented by a group of muppets which will rubber-stamp anything the CEO wants to do. So I’d love to see board pay reduced substantially at Goldman. With any luck, that in and of itself would result in the departure of James Johnson.

My feeling is that the ideal pay for Goldman board members is somewhere in the $50,000 to $80,000 range. If board members get rich, it should be from the appreciation of the shares they buy, rather than from money they’re paid to turn up to board meetings. Management has a strong incentive to put already very rich people on its board: they’re inured to large sums of money, and are therefore much less likely to blink at compensation packages which can reach well into the eight-figure range. So let’s hire directors for whom an extra $50,000 will actually make a noticeable difference to their annual income.

It’s pretty much impossible to imagine what Johnson could possibly have done, on Goldman’s board, that could justify his $523,000 remuneration. Instead, it looks like hush money. So while voting him off the board would be a great place to start, shareholders who care about governance shouldn’t stop there. Because so long as Goldman’s board members are taking home enormous sums, there’s not going to be any real oversight at the company.


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“When Senator Barack Obama chose James A. Johnson to run his vice presidential search, he was choosing an ultimate Washington insider: a nationally recognized business executive who also helped Walter F. Mondale and John Kerry pick their Democratic running mates…” ce/timestopics/people/j/james_a_johnson/ index.html

Posted by alea | Report as abusive

“But Goldman’s shareholders don’t want to be represented by a group of muppets which will rubber-stamp anything the CEO wants to do.” (FS, Article)

Says who?

S/Hs want GS to make every nickel it can – by any method it can – and give them their cut, after the Street boys take theirs. Do you really believe any shareholder thinks the board members know how to run that kind of ruthless “rip their eyes out” operation more productively than the Wise Guys?

Wall Street has crossed the line into RICO territory, and already pleaded to more charges than it takes to put a mafia Don in a cell. The shareholders are just part of the “crew”.

Posted by MrRFox | Report as abusive

Not providing D&O insurance to directors and having directors for whom $50k makes a noticeable difference to their annual income are mutually exclusive, unless the directors in question are so stupid that they ought to be disqualified for lack of intelligence. The classic phrase “anyone can be sued for anything” applies, and a public company director can easily spend high six or low seven figures to defend a suit in which the director ultimately prevails. What rational person would want to take that risk for $50k per year, unless they’re sufficiently wealthy that the prestige of being on a board outweighs the risk of having to spend a million or two?

Alternatively, this may be one of those cases where Buffett’s folksy comments simplify or distort a more complex reality. Berkshire Hathaway can broadly indemnify its directors against any claims arising out of their service as directors without purchasing D&O insurance. In that case, directors are simply relying on Berkshire’s financial strength rather than the solvency of a third-party insurer. I suppose that’s an incentive to make sure that Berkshire doesn’t go bankrupt, though that’s a pretty low bar to clear.

Regarding James Johnson, I concur that on the merits he is a poor choice to serve on a board. As an investor, however, I would rather that large public companies have engaged board members paid $500k per year than ones paid $50k who lack the time, experience, or inclination to oversee management. For example, take the example of a company CEO who also serves on 4 or 5 other company boards – how much time can this person reasonably devote to each of them? I’ve often thought that large institutional investors would be wise to recruit people to serve as professional board members – i.e., their job is serving on something like 3 to 5 corporate boards, and institutional investors actively push these people onto boards suited to their skills or background or just to break up overly clubby boards. Retired executives come to mind as the most likely candidates for this role, though perhaps also people with other backgrounds.

Posted by realist50 | Report as abusive

“Wall Street has crossed the line into RICO territory”

This is why I cut Mr Fox slack.

Posted by KenG_CA | Report as abusive

alea, was running the mondale and kerry campaign meant to be a recommendation?

Posted by Danny_Black | Report as abusive

“Con la entrada en vigencia del acuerdo hoy hay cerca de 18 aos de proteccin para el sector lcteo colombiano que hay que aprovechar para hacer la transformacin de la industria lctea colombiana”, agreg por otra parte el ministro.