Goldman: What Might Have Been

There is no surprise that Goldman settled with the SEC yesterday. The firm would have been foolish not to, and the sooner the better. Two surprises did come out of the settlement, one minor and one major:

• The minor surprise was the settlement amount of $550 million. I thought the SEC would peg the fee to get out of the penalty box at $1 billion, a number that would memorialize for the ages the whole reason it brought its case against Goldman. In my opinion, at its core this case was never really about Abacus. It was a statement by the SEC that the ethos of Wall Street, from the head firm (Goldman Sachs) down through the tentacles of every trading outfit, was poisoning the capital markets and jeopardizing the soundness of the economic system. The lower number dialed down that statement, but the SEC accomplished its intended and appropriate "come to Jesus" moment.

• The major surprise was that Lloyd Blankfein kept his hold on the firm. "Some had speculated the legal dustup would at least cost him his chairmanship," noted New York Times reporter Graham Bowley in his account of the leadership implications of the SEC deal for Goldman.

I never expected that the SEC would force Blankfein out. I did anticipate that, in allowing him to stay on as CEO, the agency would insist on the firm having an independent nonexecutive chair. This would not have to be a permanent split, but long enough — perhaps two years — for the firm to rebuild its battered reputation.

This is the action that would have made a substantial statement to a nation still suffering from the ill effects of a Wall Street gone amuck that the leading firm in finance is indeed serious and committed about finding its "true north" again.

I use that phrase deliberately, because here is the thing — Goldman Sachs has sitting on its board the one person who could step into the nonexecutive chair role and get the firm perceived as being regrounded in a sense of ethical leadership. That person is Bill George (pictured). Mr. "True North" himself.

A passing glance at Bill's career — his business accomplishments and contributions to the thought leadership of "doing the right thing" — would persuade that Goldman had taken a decisive step in addressing its defaced image. That should have been a desired outcome of the settlement, one that the firm fully embraced — meaning that Goldman might have proactively taken this action, with or without SEC prompting. It certainly could live with shared leadership, as there is a legacy of shared leadership (albeit insiders) of the firm, as witness the eras when John Whitehead and John Weinberg shared the reins, and then when Robert Rubin and Stephen Friedman were co-leaders.

So, a major surprise in the Goldman SEC settlement, and a major missed opportunity for the firm to restore a sacred reputation for trustworthy and far-sighted leadership.

Weinberg's Words

So, Lloyd Blankfein thinks the SEC's attack on Goldman Sachs is politically motivated and is telling clients, according to today's Financial Times, that it will "hurt America."

Sidney Weinberg must be spinning in his partner's office in the great beyond.

Weinberg is a renowned past leader of Goldman Sachs & Co. He joined the firm in 1907 and became chairman in 1930, heading it until 1969. His son John joined the firm in 1950, eventually rising like his father to head the firm as co-chair with John Whitehead from 1976-1984 and as sole chair until 1990.

Weinberg pere died in 1969, but he was the author of a cover story in the Summer 2003 edition of Directors & Boards. How that happened was that we got our hands on a remarkable speech that he delivered in 1949 to the Harvard Business School Club of Cleveland. He titled his talk, "The Functions of a Corporate Director." Why this speech is remarkable was the very reason I made it the cover story — I wanted to bring to a modern-day audience a "present at the creation" document that put forward how a public company board of directors needs to conduct itself for a progressive era of governance. It was everything the most assertive activist investor would want to hear.

I think of Sidney Weinberg, nicknamed "Mr. Wall Street" by the New York Times for his vast influence in his day on the banking business, spinning madly at Blankfein's assertion that the SEC is "hurting America" because here is what the distinguished banker warned in his 1949 speech:

"One must remember that every time a national corporation takes a step which is, or appears to be, against the public interest, it reacts on all corporations and is detrimental to our whole system of private enterprise."

The message, then, from one former Goldman chairman to his present counterpart: You are right about America being hurt, but are very wrong about the reason — it's not the attack on Goldman but what Goldman may have done to draw out the attack dogs.

A Flashback

The announcement this week of a leadership change at the J. Paul Getty Museum sparked a memory of a former leading figure in the evolution of modern-day corporate governance, Harold Williams. Williams was chairman of the Securities and Exchange Commission when I first got into the business world in the 1970s. After he stepped down as SEC chair in 1981 he became president and CEO of the J. Paul Getty Trust, a cultural and philanthropic institution that includes the museum among its operations.

When people want to know about the history of Directors & Boards, I tell them that it was founded, in 1976, during a time of great trouble in the boardroom. Corporate America was caught in the ugly glare of the foreign payoff scandals, when boards seemingly were unaware of the behavior of their managers in illegally bribing foreign agents for contracts and were oblivious to the legerdemain in the corporate accounting. (Does that last part sound familiar?) Congressional hearings ensued, and a new law was enacted — the Foreign Corrupt Practices Act.

The SEC began putting the pressure on boards to act more responsibly, and independently. The SEC had two activist chairmen in the 1970s — first with Roderick Hills and then with Harold Williams — who strongly moved the needle in the direction of boards rethinking their role, their behavior, and their composition. A new era in the evolution of corporate governance got underway.

During his reign in Washington, Williams table thumped for separating the chairman and CEO positions. Yes, a topic that is still much debated today, some 30-plus years later, was a hot subject then at the SEC and in boardrooms – maybe I should say a "hot potato."

And that's why a remembrance of Williams comes so readily to mind with the news out of the Getty organization. I am about to publish a major piece on the wisdom — or folly — of separating the chairman and CEO jobs. Look for this as the cover story in the First Quarter edition of Directors & Boards, off press next month.

In a way, this separating the roles analysis returns the journal to the era of its roots — when boards were in big trouble for improper risk management and financial oversight, when the government was making life in the boardroom less comfortable, and corporate governance was about to enter a new phase in its evolution toward independent leadership.

Up with the Uptick Rule

The Wall Street Journal is reporting this week that the SEC has been deluged by support for the return of the uptick rule — the trading rule in which there had to be an uptick in a stock's price before traders could short the shares. The agency put the proposal out for comment in April, and is receiving comments until June 19.

Boards and CEOs hate short sellers. I never met a CEO who thought his company's stock was priced correctly. And then, to think that there is someone out there who is betting against the stock strikes most as just beastly.

I have a comment to make about the uptick rule. It's something that I observed that never got the attention that it deserves. The uptick rule was suspended in July 2007. Shortly thereafter, the first big quakes happened in the market.

I remember it well. I took a vacation in August 2007 to Boston with my wife to visit an exhibition of Edward Hopper at the Boston Museum of Fine Arts. (Pictured is Hopper's "Office at Night," my favorite work by the artist, a reproduction of which hangs in my office.) That week in mid-August the market convulsed. I spent way too much time in the hotel room glued to CNBC watching as the market just dropped and dropped some more, and then dropped yet again. Unbeknownst to all, this was just the opening salvo of the market rout to come over the next 18 months.

I always drew a heavily dotted line between the lifting of the uptick rule and, in the immediate aftermath, the market's first big free fall. So I'm in favor of reimposing the rule. If the academics and their studies are right that the uptick rule has no influence in a stock price's downward spiral, then what's the harm in reinstating it? And if the rule does ameliorate the short-selling forces that would send a stock plunging, then let's bring it back, as there must have been a good reason to have it in the first place.

CEOs and boards will never be free from short sellers. But on the chance that this is a minor market adjustment that can restore some bit of rationality to how their shares trade, then this is one less thing for them to worry about. That's a good thing ... as there is plenty else going on in their governing lives at the moment to be concerned about.