A union pension fund has filed a shareholder suit challenging the bonuses Goldman plans to pay its employees. Marc Hodak provides some key context:
Before 2008, in a decade of market outperformance, the firm paid out nearly 50 percent of net revenues in a combination of cash and shares to its employees, most of it in so-called bonuses. In 2008, when Goldman Sachs underperformed the entire financial services sector by about 10 percentage points, they paid their senior executives zero. In 2009, when they outperformed the financial services sector by nearly 100 percentage points, they intend to pay out 40 percent of net revenues in bonuses, all of it in the form of restricted shares.
Given that an investment bank's principal expense is providing its key employees with a commensurate return on their human capital, it's hardly surprising that those employees get a significant chunk of the revenues.
Hodak concludes:
Given these facts, it’s hard to see this lawsuit as anything but a waste of money by this pension fund’s leadership, who appear to be using their pensioners’ cash to indulge in political grandstanding. Who is breaching their fiduciary responsibility here?
The disconnect between the interests of those who run union pension funds and their beneficiaries has been a major theme of my scholarship on shareholder activism. For more detailed treatment of the problem, see, e.g., Shareholder Activism in the Obama Era, in which I explain that:
The vast majority of large institutional investors manage the pooled savings of small individual investors. From a governance perspective, there is little to distinguish such institutions from corporations. The holders of investment company shares, for example, have no more control over the election of company trustees than they do over the election of corporate directors. Accordingly, fund shareholders exhibit the same rational apathy as corporate shareholders. Kathryn McGrath, a former SEC mutual fund regulator, observes: “A lot of shareholders take ye olde proxy and throw it in the trash.” The proxy system thus “costs shareholders money for rights they don’t seem interested in exercising.” Indeed, “Ms. McGrath concedes that she herself often tosses a proxy for a personal investment onto a ‘to-do pile’ where ‘I don’t get around to reading it, or when I do, the deadline has passed.’” Nor do the holders of such shares have any greater access to information about their holdings, or ability to monitor those who manage their holdings, than do corporate shareholders. Worse yet, although an individual investor can always abide by the Wall Street Rule with respect to corporate stock, he cannot do so with respect to such investments as an involuntary, contributory pension plan.
For beneficiaries of union and state and local government employee pension funds, the problem is particularly pronounced. As we have seen, those who manage such funds may often put their personal or political agendas ahead of the interests of the fund’s beneficiaries. Accordingly, it is not particularly surprising that pension funds subject to direct political control tend to have poor financial results.
