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Goldman Needs Financially Savvy Directors

Eric Jackson, Senior Contributor

02/24/10 - 09:11 AM EST

Goldman Sachs (GS) had a great 2009.

The results were so good that Directorship Magazine named Lloyd Blankfein its CEO of the Year for 2009 and one of its 100 most influential voices in the board room at an awards dinner last fall. The award recognizes a CEO's achievements during the year but also a company's board for having done an exemplary job of company oversight.

Despite Goldman's many successes, its board shouldn't be held up as a role model for others, as the case of a departing Goldman director last week illustrates.

Goldman is one of the best managers of risk of any large company in the world. In a business, where the bulk of their earnings come from trading, they have successfully learned to manage risks daily.

Arguably, any company's last backstop for risk management is its board of directors. Ultimately, the buck is supposed to stop with the CEO and the executive management. The CEO gets hired and fired by the board, who agrees on key hires and sets compensation for the executive team and signs off on the company's financial statements and its internal risk management policy.

Since Enron's blowup, the concept of "board independence" has been required of all boards. If we have a majority of sufficiently independent directors in place, the thinking goes, they will be able to better monitor a CEO and a management team.

In practice, many CEOs have selected people who meet the independence standard but come from outside the industry of the company on whose board they serve. Even worse, some CEOs have chosen directors from the nonprofit world or academia, with no business experience at all.

Another popular type of director who has emerged from the push for board independence is one who is clearly friendly with a CEO but, from a definitional perspective, still qualifies as "independent."

Many CEOs want a board that they get along with and will basically let the CEO do what he or she wants to do. If you were a CEO, wouldn't you want that? Better yet, if you were President Obama or Bush, wouldn't you not want to have to run for election every four years? What a hassle!

As I indicated in an article in TheStreet last August, Goldman's board has been too cozy for too long. At the time, I criticized the composition of the board.

The 13-member board has three insiders (CEO Blankfein, president & COO Gary Cohn, and secretary John Rogers) and one ex-insider (Stephen Freidman, who was in the news recently for stepping off the board of the New York Federal Reserve Board after the sign-off on the AIG (AIG) counter-party rescue in 2008).

Goldman's board also has five former or current CEOs including Lakshmi Mittal, current CEO of ArcelorMittal (MT); Lois Juliber, former COO of Colgate-Palmolive (CL); James Johnson, former chairman & CEO of Fannie Mae (FNM); William George, former CEO of Medtronic (MDT); and John Bryan, former chairman and CEO of Sara Lee (SLE).

These are all successful people who are savvy about business. But none is an expert in trading and risk management for such trading.

Others on Goldman's board include Rajat Gupta (former head of McKinsey), Claes Dahlback, an adviser to a Swedish venture capital firm, and Ruth Simmons president of Brown University. Simmons is a career academic, with no direct experience working in capital markets.

Last year, I questioned Simmons' ability to push back on internal debates of firm strategy and risk oversight. I've heard some argue that she is a brilliant person who helps inspire other women and minorities. I would say that there are lots of book-smart people in the world, but that doesn't mean they have the backgrounds and experience to effectively oversee a complex firm like Goldman Sachs.

And, while different backgrounds on a board is great, every director needs to bring a basic understanding of how the business works in order to do the job.

I was pleased when Felix Salmon of Reuters recently started questioning why Simmons was on the Goldman board. He uncovered some odd statements she made in an interview about how she originally agreed to serve on Goldman's board at the urging of the Smith College Board of Trustees who believed it would help burnish the college's image to have its then-president on such an esteemed company's board as Goldman. I was further pleased when Simmons quietly announced she was leaving Goldman's board late last Friday.

Goldman's board isn't any worse than any other large financial institution. However, it's not any better, either. When we give out awards to executives for having a strong "voice in the boardroom" based on rear-view looking stock performance, something's wrong. The best boards don't correlate with most recent stock price returns; they correlate with preventing future disasters.

Goldman Sachs should take the lead in bringing on more financially savvy directors to their board. There are such people who aren't former Goldman employees, customers or advisers. And it's also possible to find such experienced people who are even collegial. I don't expect board meetings to have to be conflict ridden and full of ill will. You can be objective and questioning, while still being respectful, friendly and fair. All boards should strive for such a balance.

-- Written by Eric Jackson in Naples, Fla.


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