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When Goldman Sachs L.P. ended its 130-year
standing as a private partnership in May 1999, the new entity,
Goldman Sachs Group, Inc.
offered to the public 69 million shares of its stock (15% of
the firm). This public offering, however, was unlike most
others. Rather than allot shares to the groups of brokerages
that distribute the stock to customers, Goldman, as lead
underwriter, handpicked each individual or entity that was to
receive the shares. Goldman maintained complete control over
who would own the firm and profit from its new role as a
public corporation.
[Further details of Goldman Sachs history and recent public
offering]
The manner of the public offering, however,
was but a recent exertion of the tight governing control that
has been the hallmark of the firm throughout its history. As a
private partnership, ultimate authority rested with the firm’s
founders and their descendents during the first half of
Goldman’s existence, and later control succeeded to those
personally chosen by the original family. This oligarchy
continues today as one of the sons of the firm’s patrician
line serves as the senior member of the company’s
board of directors.
The non-management holders of Goldman stock
fear that--in light of the large percentage of the firm that
is held by management, the manner in which the public offering
was conducted, and the history of tight control formerly
exercised by the partnership leaders (some of whom control the
company today)--Goldman is essentially under management
control, and their interests as shareholders may not be
diligently protected. These fears could be partially assuaged
by changing the manner in which those charged with governing
the corporation are selected.
Currently, the corporation’s
Certificate
of Incorporation and
bylaws
provide that the board of directors will be divided into three
classes with the term of one class expiring each year. At the
annual shareholder’s meeting, directors will be elected to
succeed the directors whose terms have expired that year. This
typical corporate governance arrangement depends, however,
upon effective shareholder voting. With only fifteen percent
of Goldman’s stock in the hands of non-management shareholders
it is unlikely these shareholders will have any control over
who leads the new Goldman into the next century. Management
will essentially become a self-perpetuating body.
The non-management shareholders of Goldman
do not wish to take more control than they are entitled. They
simply desire that a minimal degree of mutability in the
corporate governance control be guaranteed. Ensuring change in
the corporate control that conserves the power of the majority
management ownership can be realized through a board of
directors selected in accord with a system of "maximum average
tenure." This concept entails factoring the average number of
years each director has served on the Goldman board. When the
board’s average tenure exceeds a specified number of years,
certain chosen directors would not be permitted to pursue
reelection to the board. The board, acting by majority vote,
could decide which of the directors would not be reelected so
that an appropriate average is maintained. This plan allows
the management ownership to retain full autonomy by
maintaining a mix of new and old directors, while at the same
time ensuring that control does not become stagnant and
self-perpetuating.
Strategy for Implementing the Maximum
Average Tenure (MAT) System
Submitting a non-binding resolution
(shareholder proposal) will likely not achieve the results
Probity and other non-management shareholders desire. A more
challenging, but potentially more effective way, to implement
the MAT plan at Goldman is for shareholders to initiate a
revision of the company’s constitutive documents. Under the
governing corporate law of Delaware, the stockholders entitled
to vote have the power to adopt and amend the bylaws of the
corporation
(Del.Gen.Corp § 109(a)). The bylaws will be effective
provided they are not inconsistent with the certificate of
incorporation (§
109(b)).
A strategy for Probity: (1) submit that the
MAT provision is not inconsistent with the Certificate; (2)
expend the goodwill capital vested in the non-management
shareholders to build the necessary coalition to amend the
bylaws.
