October 10, 2008
The Warren Buffett Solution: Implement Hold-Til Retirement Provisions
– Broc Romanek, CompensationStandards.com
Recently, I blogged about our implementation guidance in the latest issue of The Corporate Executive. It was heartening to see that Warren Buffett agrees with this concept – forcing senior Goldman Sachs executives to agree to such provisions before he invested $10 billion in the beleaguered bank. Below I repeat a WSJ article from Wednesday:
Buffett Insists Goldman Executives Are Also Owners (by Yogita Patel)
In exchange for his $5 billion investment in Wall Street firm Goldman Sachs Group Inc., Warren Buffett is due a hefty dividend and an equity kicker, but he also got something else: a commitment from top company insiders that they will continue to hold a substantial stake in the firm. Chief Executive Lloyd C. Blankfein and three other top executives agreed that they won’t part with more than 10% of their common-stock holdings until October 2011, unless the company first redeems Mr. Buffett’s perpetual preferred shares.
In a tumultuous period in which executive pay at financial companies is under close scrutiny, the four executives’ commitment sends a strong signal to Mr. Buffett and to the market in general, said Reena Aggarwal, a professor of finance at Georgetown University. “There is so much anger at Wall Street executives right now that they end up making their money and everybody else is left out there with empty pockets,” Ms. Aggarwal said. “By doing this, [the Goldman Sachs executives] are kind of sending a signal to the market that they are not just going to run out and cash their stock holdings.”
On Sept. 23, Goldman Sachs announced that Mr. Buffett had agreed to buy $5 billion of perpetual preferred stock with a 10% coupon. Goldman Sachs has the right to redeem the preferred shares at any time, but the firm must pay a 10% premium to do so. Mr. Buffett’s investment vehicle, Berkshire Hathaway Inc., also got the right to buy $5 billion in Goldman Sachs shares at $115 a share, the price they were trading at in 4 p.m. composite trading on the New York Stock Exchange Tuesday after falling $9.00, or 7.3%.
Thursday, Goldman Sachs disclosed that Mr. Blankfein, Chief Financial Officer David A. Viniar and Chief Operating Officers Gary D. Cohn and John Winkelried had agreed to hang onto at least 90% of their current stock holdings for the term of the agreement. Their spouses and estate-planning vehicles are similarly restricted under the deal. Representatives of Goldman Sachs and Berkshire Hathaway declined to discuss the agreement.
Ben Silverman, research director at InsiderScore.com, said the agreement was necessary to show that the executives are committed and will work to create value at the company, which recently converted to a commercial bank. “The purpose of the agreement is simply to ensure that top management continues to have their interests aligned with that of shareholders, including Berkshire Hathaway,” said Mr. Silverman, whose firm tracks and rates insider stock transactions. According to Goldman’s most recent proxy, as of Feb. 11 Mr. Blankfein had beneficial ownership of 3.4 million shares, Mr. Cohn of about two million shares, Mr. Winkelried of 2.8 million shares and Mr. Viniar of 1.9 million shares.
Mr. Silverman said it is important for this type of agreement to leave executives with some wiggle room for estate planning and personal liquidity — hence the permission for the insiders to sell up to 10% of their current holdings. Ms. Aggarwal said the Goldman Sachs executives made a bold move by agreeing to the limits. “Any time you put a restriction, you’re taking away an option,” Ms. Aggarwal said. “If they didn’t want to sell, they didn’t have to, but now they definitely can’t sell.”