Goldman board muppet of the day, James Johnson edition

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.┬áSo 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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