Thursday, December 03, 2009

Goldman Sachs & Backdoor Governance

Goldman Sachs Group (GS) continues to have a most capitalistic problem. Their employees make too much money. They currently are in discussions with major investors to prove that their compensation is in line. The investors are motivated by legal storm clouds that are compelling them to investigate. This is probably the worst case scenario of corporate governance through the back door. Some kind of deal needs to be worked out so that the big funds get the cover they need. Otherwise the stock becomes too hot to hold and everyone heads for the exit doors. Many of these investors actually trade with Goldman or use their services so it’s rather hypocritical that they are scrutinizing Goldman in this fashion.

Here are a few things Goldman can do.

1. Increase their dividend. The yield is abysmally low at these levels. If they are a bank holding company they will need to raise capital just like the other bankers. Investors will be rewarded.
2. Declare special dividends when results are good. The capital Goldman uses is rented they will need to pay for it. Otherwise why not just poach the good guys and set them up in their own shops.
3. Stop calling it a bonus and embrace an accounting term that covers risk such as profit sharing. These guys are not true employees like most wage slaves. They are entrepreneurs and they are there for the big score.