Pension fund launches suit against Goldman over bonuses

Posted by Marc Hodak on January 11, 2010 under Politics | 2 Comments to Read

The Central Laborers Pension Fund, an Illinois pension, is suing Goldman Sachs over the approximately $20 billion that the firm is looking to pay out in bonuses for 2009. Their rationale:

Defendants’ conduct shows that, even though Goldman is supposedly owned by public shareholders, defendants have scant regard for the interests of those shareholders.

This suit shows that the Illinois pension fund has scant regard for the evidence to the contrary regarding how Goldman Sachs’ takes care of its shareholders. Before 2008, in a decade of market outperformance, the firm paid out nearly 50 percent of net revenues in a combination of cash and shares to its employees, most of it in so-called bonuses. In 2008, when Goldman Sachs underperformed the entire financial services sector by about 10 percentage points, they paid their senior executives zero. In 2009, when they outperformed the financial services sector by nearly 100 percentage points, they intend to pay out 40 percent of net revenues in bonuses, all of it in the form of restricted shares.

Given these facts, it’s hard to see this lawsuit as anything but a waste of money by this pension fund’s leadership, who appear to be using their pensioners’ cash to indulge in political grandstanding. Who is breaching their fiduciary responsibility here?

Bernard S. Sharfman said,

Assuming that the board of GS is made up of a majority of independent and disinterested members, there is little chance of proving that a breach of fiduciary duties has occurred. But lets assume it is the union’s desire to realign the interests of the board with shareholders that is their goal. If that is the case, then plaintiffs should read “When Shareholder Primacy Does Not Apply,” http://works.bepress.com/bernard_sharfman/15/ for a discussion of why shareholder primacy has been contracted away at firms like GS. When this occurs a board cannot simply follow a shareholder wealth maximization norm when making its decisions. By entering into implicit contracts with the potential of significant cash payouts (compensation plans that feature large cash bonuses), shareholder primacy is contracted away, creating residual claimants that rival the influence of shareholders. If that is the case, why doesn’t the board just stop entering into these types of bonus contracts? The simple answer is that the marketplace for traders and investment bankers will not allow them to do so without creating a mass exodus of valued employees.

Best regards,

Bernie
Goldman Comp Suit Tossed Out » Hodak Value said,

[…] January, when I was still updating this blog regularly, I wrote about various unions bringing suit against Goldman Sachs for their compensation practices. In particular, they objected to the firm’s longstanding […]