In Re The Goldman Sachs Group, Inc. Shareholder Litigation

Facts

Goldman employs a “pay for performance” compensation philosophy that links total compensation of its employees to company performance. Goldman uses a compensation committee to implement this pay for performance scheme. Management provides revenue estimates and puts forward a compensation ratio to the Compensation Committee, which looks at competitor ratios. The Committee would approve a ratio for Goldman, and that is used to calculate employee compensation. From 2007 to 2009, the directors (Ds) allowed compensation of 44 percent of net revenues each year. Because management was awarded a constant percentage of total revenue, management could maximize compensation by increasing total net revenue and total stockholder equity. Ps sued Ds alleging that this scheme encouraged highly risky investments for short-term profits in order to increase yearly bonuses. Ps allege that the shareholders bore the risk while earning only 2 percent of the revenue in the form of dividends. Ps use as an example the fact that in 2008 the Trading and Principal Investment segment made $9.06 billion in net revenue, and from discretionary bonuses paid out, it lost $2.7 billion. Without a cash infusion from Warrant Buffett, federal intervention, and conversion of Goldman into a bank holding company, Goldman would have had to declare bankruptcy. Ps allege that the Audit Committee failed in its job to oversee risk. Ps alleged that D breached their fiduciary duties by: “Failing to properly analyze and rationally set compensation levels for Goldman employees. “Committing waste by ‘approving a compensation ratio to Goldman employees in an amount so disproportionately large to the contribution of management, as opposed to capital, as to be unconscionable.’” Goldman’s charter allowed exculpation under § 102(b)(7).

Issues

Rule of Law

Holding and Decision

Legal Analysis

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