RI Analysis: How judge rejected pension fund claim over Goldman bonuses

Investment bank defeats investors over bonus billions

Responsible Investor takes a look at how the legal action brought by US pension fund investors seeking to recover billions of dollars of bonus payments from investment bank Goldman Sachs has been defeated.
The lawsuit was originally filed by the Illinois-based Central Laborers’ Pension Fund in January 2010 as a so-called shareholder derivative complaint. It was later consolidated with similar complaints from the Security Police and Fire Professionals of America Retirement Fund and two private investors.
It alleged that Goldman’s board and executives breached their fiduciary duties by reserving 50% of the firm’s revenues for employee pay. It was thrown out by Judge Bernard Fried of the Supreme Court of the State of New York yesterday.
Perhaps the most interesting aspect of the judgment is the way Judge Fried refers to meetings Goldman had with shareholders over bonuses in 2009 to justify, in part, his dismissal of the case.
The Central Laborers’ complaint had cited a Wall Street Journal report suggesting these meetings had the additional motive of helping Goldman deal with potential compensation reform.
“The very existence of these meetings suggest the Board took external factors – including the perspective of shareholders – into account while making its decision on 2009 compensation,” Judge Fried writes.

In a footnote, he continues: “The allegation that the board solicited shareholder feedback, irrespective of [the] claim that it may have been done with an ulteriormotive, rebuts any inference that the board did not act in the best interest of the company.”

Fried says the investors’ complaint lacks “particularized facts” that the board abdicated its responsibilities.
Although he notes the investor plaintiffs’ “outrage” over the board’s decisions on pay over the years, he says the allegations “do not provide any basis for the conclusion that the board acted for any purpose other than the advancement of the company’s interests”.

The investors had claimed that Goldman is still being run as a private partnership, although it went public in 1999. And they argued that Goldman has paid out a “staggering $104.9bn” in compensation since going public – while net revenues distributable to shareholders was just $46.8bn. Meanwhile, all the firm’s trading risk was now “borne entirely by Goldman’s shareholders”.
The investors had also claimed the Goldman board is not independent as each non-executive director was “beholden to Goldman, [COO] Gary Cohn, [CEO] Lloyd Blankfein and other executives”.

They used the example of board member Ruth Simmons, the President of Brown University. She earned $536,000 in her university role in 2009 – meaning her Goldman pay ($667,064 in 2007) was a “compelling financial incentive” to remain beholden to Goldman.

But the judge said that as Simmons’ Goldman fee “may only comprise a small a small percentage of her total annual compensation”, it was not sufficient to doubt her independence.