Corporate Governance

Goldman Sachs and Challenging the Delaware Model

By J. Robert Brown

Lloyd Blankfein, the CEO of Goldman, gave a speech to the Council of Institutional Investors on Tuesday.  The speech recognized that, going forward, there had to be changes in the way executive compensation was set (noting that some of them might be forced on industry in the form of legislation).  He likewise noted that companies in the financial sector had taken a lax attitude towards risk:

• A systemic lack of skepticism was equally true with respect to credit ratings. Too many financial institutions and investors simply outsourced their risk management. Rather than undertake their own analysis, they relied on the rating agencies to do the essential work of risk analysis for them. This was true at the inception and over the period of the investment, during which time they did not heed other indicators of financial deterioration.

While Blankfein did not specifically mention the Delaware model of governance, he didn't need to.  His speech was in effect a condemnation of business as usual at the top levels of the company (including the board). 

It is the Delaware model that permits executive compensation models based upon short term benefits that have long term destructiveness to the company.  It is the Delaware model that allows boards to have little or no responsibility when it comes to excessive risk taking (In re Citigroup certainly demonstrates that).  With voices for reform growing within industry itself, perhaps some type of federal legislation that takes executive compensation away from Delaware becomes more likley.

Full post as published by The Race to the Bottom on April 11, 2009 (boomark / email).