Goldman Needs Financially Savvy Directors

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.