Goldman Sachs' moral obligation to Wall Street

(Fortune) -- After much fanfare, the shareholder meeting at Goldman Sachs ended Friday, much as the world ends in T.S. Elliot's, The Hollow Men: "Not with a bang but a whimper."

Up for a vote by shareholders was the separation of the chairman and CEO positions at Goldman, which are currently held by Lloyd Blankfein. In support of the proposal, Julie Tanner, Assistant Director of Socially Responsible Investing at Christian Brothers Investment Services, said in a statement: "While separating the positions of Chair and CEO is not a guarantee against future scandals, it does provide another layer of checks and balances and could improve the board's ability to oversee the activities of the company."

Meanwhile, Proxy Democracy, which helps investors keep track of the actions of institutional shareholders, reports that both AFSCME's employee pension plan and CalPERs voted in favor of the measure. The Florida State Board of Administration and the Ontario Teacher's Pension Plan also voted in favor, according to industry watcher, Pensions & Investments.

Against the measure, and in favor of the chairman and CEO positions being held by the same person, Goldman (GS, Fortune 500) wrote in its proxy: "The combination of our Chairman's ability to call and set the agenda for Board meetings with the CEO's intimate knowledge of our business provides the best structure for the efficient operation of our Board." (Emphasis added.)

In the end, the Goldman position prevailed. Nevertheless, at this critical moment in the investment bank's history, its board may wish to consider a more active role in setting its own agenda. Boards do not exist in the governance structure to create efficiency. (The most efficient form of governance is a dictatorship.) Boards as a governance structure are meant to provide oversight to ensure management's actions are in the best long-term interests of the company and all stakeholders.

While proponents of combining the roles of the CEO and chairman are right when they say there can only be one captain of the ship and the CEO is that captain, the board is not meant to be deckhands. Instead, the board is the group of individuals at the home office, who oversee and approve the sea captain's strategies and operations. Good governance is not achieved when the CEO "sets the agenda for Board meetings," a function that should be directed by independent members of the board.

The broader public interest

While shareholders in Goldman are one set of participants in the company's story, they are not the only ones who should care about what its board does from here. As reported by the Wall Street Journal, Blankfein issued a welcome acknowledgement of the work ahead in his opening statement at the shareholder's meeting:

"There is no bigger priority for our Board of Directors and management than to undertake a comprehensive review of all of our business practices. This effort will be defined by one central question: Are the clients of Goldman Sachs and the broader public interest being served in a manner entirely consistent with their highest expectations? ... it is clear that our firm must renew the core principles that have sustained it for 140 years. On behalf of every person at Goldman Sachs, we pledge to you to do everything to fulfill that commitment." (Emphasis added.)

This is indeed a welcome step because while putting clients first is part of what needs to be addressed at Goldman, putting clients first is not enough: The "broader public interest" must also be served. To ensure "the principles that have sustained it for 140 years" become part of Goldman's operating principles, the board needs to understand the company's history. It needs to understand that the core values of the firm were once more expansive than Goldman's current 14 Principles -- they did encompass the broader public interest, and it is this higher standard it needs, once again, to embrace.

Retired co-chairman of Goldman, John Whitehead, described this higher standard in a conversation we had a few years ago. The example Mr. Whitehead used in our conversation related to the underwriting of stock with non-voting or limited voting shares. He explained:

"There began to grow up a practice of managements deciding to sell non-voting stock to the public, to raise capital by selling non-voting or limited voting stock. And I immediately thought that that was a bad idea. That people's capitalism, the system that we have, depends on the age-old system of one-share-one-vote. And I believed that and I thought that if we want the public to buy stock, they ought to have a vote... And even if one vote out of 100 million shares is not a heavy voting right ... The symbolism of that would be wrong ... And someday... we would wish that that hadn't happened because the stockholders would rise up and say we can't create change by voting to change the company. The only thing we can do is sell our stock. So Goldman Sachs decided that it would not underwrite non-voting [or limited voting] stock, and that was a surprise because we lost some business when companies came to us and asked us to sell [it]."

Because of Goldman's stance, the idea of non-voting stock or limited voting stock began to fall out of favor. And as Whitehead told me, "people began to consider, do they really want to be a little out of line by selling non-voting stock? Having people a little suspicious of trying to peddle non-voting stock? What are they trying to do...? And gradually, it fell out of practice. And gradually, companies that had those kinds of shares eliminated their non-voting shares and then replaced them with full voting rights."

The actions of Goldman at that time (until reversed later by Goldman and others on Wall Street) had a positive influence on the capital markets system because Goldman was not willing to do whatever clients asked for; its willingness not to do business was for the greater public good, the more general good of the capital markets.

If the pledge by Mr. Blankfein at the start of the Goldman shareholder meeting holds true, i.e., that he and the board will do everything to fulfill a commitment to "renew the core principles that have sustained it for 140 years" including serving "the broader public interest ... in a manner entirely consistent with their highest expectations," Goldman Sachs will be exercising the moral leadership that the capital markets today desperately need.

With that kind of moral leadership, in keeping with its 140-year history, Goldman will not underwrite product, even if clients want it, if that product would be harmful to the broader capital markets. With that kind of moral leadership, Goldman will again be a leader making a positive difference in the practices on Wall Street. Although that vision may seem to be distant from the actions of the last decade, the Goldman board and the boards of other Wall Street firms need to return to that high standard and that level of core values for the public interest. The financial instability and crises reverberating around the world demand it.

Eleanor Bloxham is CEO of The Value Alliance and Corporate Governance Alliance, a board advisory firm.