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Proxy moxie: Goldman in activists’ cross hairs

The Goldman Sachs Group Inc. is seen as target No. 1 for activist investors looking to shake up corporate boards now that the Securities and Exchange Commission has made it easier for shareholders to nominate directors.

The Goldman Sachs Group Inc. is seen as target No. 1 for activist investors looking to shake up corporate boards now that the Securities and Exchange Commission has made it easier for shareholders to nominate directors.

Corporate governance activists are pushing to replace up to a quarter of Goldman’s directors at the annual meeting next spring unless the board strips chief executive Lloyd Blankfein of his position as chairman.

A campaign against the Goldman board “is definitely something worth looking at,” said Julie Tanner, assistant director for socially responsible investing at Christian Brothers Investment Services, who introduced a shareholder resolution at Goldman’s annual meeting last spring seeking Mr. Blankfein’s ouster as chairman. “We could nominate our own candidates to the board because we question, as do other investors, why the current board leadership has taken no action in light of what’s happened at Goldman recently,” she said.

REPUTATION HAMMERED

Goldman’s reputation has taken a stiff beating since the SEC charged it with securities fraud in April. The firm settled the case in July for $550 million and acknowledged it made “a mistake.”

Mr. Blankfein’s stature on the board appears undiminished — he handily beat back the Christian Brothers resolution in May, although that happened before the firm settled the case. Activists are now seeking ways to revisit the issue.

A senior official at a union pension fund said that Goldman’s board is the prime target for investors looking to flex their muscles under the new SEC rule.

“Goldman is the top one because of the SEC fraud action,” said the official, who declined to be identified because the union hasn’t finalized its plans yet.

There was no comment from Goldman representatives.

Shareholders like Ms. Tanner ordinarily wouldn’t worry Goldman. Her asset management firm, which manages $3.6 billion for Catholic groups, owns 63,000 Goldman shares, or a mere 0.012% of the bank’s 516 million outstanding shares. However, a landmark ruling by the SEC last month makes her potentially much more influential.

GETTING TO 3%

The SEC determined that investors can nominate their own directors if they own 3% of a company’s stock and can combine their holdings with other shareholders to reach the threshold. It’s a sea change for board elections, where candidates in most cases are selected by management only. While investors are limited to nominating 25% of directors in any year, the power they’ve been granted by the government is considered so threatening that the U.S. Chamber of Commerce is threatening to sue.

Christian Brothers’ tiny investment in Goldman means that it is far from having enough votes to present board nominees. But a likely source of allies may be the 20 largest public pension plans on the shareholders list at Goldman, which collectively hold 2.88% of the firm’s stock, according to a letter to the SEC this month from the California Public Employees’ Retirement System. Public pension plans tend to be sympathetic to corporate governance causes like Christian Brothers’.

But even if all the pension funds lend their support, it will be difficult to unseat anyone from Goldman’s board. The firm may have public relations problems and a stubborn board, but it’s still hugely profitable, generating $3.7 billion in earnings during the first half of the year.

“Performance there is too good” for a successful insurgent campaign, said Michael Garland, director of capital strategies at the labor organization Change to Win.

Activist shareholders are busy sifting through lists of companies that have consistently rebuffed shareholders asking for board-level reforms. Contested board elections are possible at the coal mining company Massey Energy Co., which was vilified after a fatal explosion in a West Virginia mine, and at Pulte Homes Inc., which has seated directors even after a majority of shareholders voted against them.

“Everything’s just in the planning stages now,” said Brandon Rees, deputy director at the AFL-CIO’s office of investment. “But a lot is going on behind the scenes.”

Aaron Elstein is a senior reporter at sister publication Crain’s New York Business.