We don’t often see CEO shareholder letters highlighted on the front page of the Wall Street Journal, but there it was yesterday, listed second on the “What’s New” sidebar. Turning to page 1 of Section C, I found the article about Goldman Sachs’ just-published 2009 shareholder letter. But what was the news hook: the over 6,000 words used to write the letter [unusually long for GS] or management’s opportunity to “Tell Its Side of ‘09”? Who could tell? The Journal suggested that management hoped the letter would deflect criticisms at the upcoming shareholder meeting that Goldman “was putting its own interests ahead of clients.” Funny, I left investment banking at Lehman Brothers in 1991 because I refused to put that firm’s interests ahead of my client’s interests. How could this be news in 2010?
Since leaving Lehman, I started an investor relations business and created a multivariate model to evaluate, score and measure the amount of candor in CEO shareholder letters.
To Goldman’s credit, they offer three times more words in their 2009 letter than the average number of words of companies in the letters that make up our annual CEO Candor surveys. But the letter signed by the two top executives fails the authenticity test. Unless these brilliant leaders normally speak in the clichés, platitudes, and mind-bending, run on sentences that are strewn throughout the letter, it is not likely they authored it. In addition, it was easy to spot both a contradiction and an important omission in the letter.
Contradiction: How does Goldman reconcile its “conservative financial profile” and “liquidity” focus with their need to raise emergency capital during the economic crisis and the subsequent payments from AIG’s taxpayer bailout? In the first full paragraph on page three of the letter, Goldman’s leaders praise its conservative financial profile and private-partnership roots. They state “it is important to highlight for our shareholders that Goldman Sachs did not and does not operate or manage our risk with any expectation of outside assistance.”
But in the next paragraph, we are reminded that the company had to raise capital to maintain liquidity during the economic crisis and got it from Warren Buffett and equity investors – before getting government funds through TARP. How does this square with the prior, “we don’t need help” paragraph? Later in the letter they report on the $12.9 billion paid to the firm by AIG after getting its government bailout. The Journal states that Goldman justifies taking the money because it was not retained. Instead, the money was used to meet Goldman’s “various AIG-related obligations.” But, think again, if this money hadn’t been forthcoming from AIG, courtesy of the U.S. taxpayer, who would have paid these obligations? Shareholders?
Omission: Is Goldman’s management committed to allocating capital for the benefit of the company’s shareholders?
Shareholders are mentioned just 12 times in the Goldman letter compared to 56 times for clients. Not only do shareholders get the short shrift, but nine of these shareholder references are clichéd references (see authenticity test above) like: “Our duty to shareholders is to protect and grow our client-focused franchise” or “achieved strong returns for our investors and shareholders.” Two noteworthy non-clichéd references are: (1) recognizing how shareholders benefited from “the indispensable role governments played” in the economic crisis; and (2) stating that “shareholders will have an advisory vote on the firm’s compensation principles” at the 2010 annual meeting.
A careful reading of Warren Buffett’s shareholder letters show that the primary job of a CEO is to intelligently and responsibly allocate capital for the company’s shareholders, or as he calls them – his partners. Buffett’s common sense brilliance in allocating capital is revealed in Chapter Five of my just released book, Buffett’s Bites: The Essential Investor’s Guide to Warren Buffett’s Shareholder Letters (McGraw-Hill).
Now look below to spot the capital allocation omission in Goldman Sachs 2009 letter:
…..Our shareholders continue to convey a strong belief in our business model and strategy, and in the importance of protecting the quality of our franchise. Our clients look to us to advise, execute and co-invest on their most significant transactions, translating into strong market shares. And our people remain as committed as ever to our culture of teamwork, to the belief in their responsibility to help allocate capital for the benefit of clients, and to the firm’s tradition of service and philanthropy. [Bold added for emphasis.]
While employees are being held accountable for “allocating capital for the benefit of clients,” readers do not learn if management is similarly committed to allocating capital for the benefit of the firm’s shareholders. Why isn’t this management’s top priority?
Still, an examination of Goldman’s balance sheet shows that that retained earnings in 2009 boosted shareholder equity over $6.5 billion year-over-year, while long and short-term liabilities were reduced by $42 billion. Both these improvements ought to make shareholders smile. Why aren’t they mentioned?
Buffett also teaches that relative, not absolute results are what matter most. How does the Goldman Sachs letter measure up on a relative basis? Stay tuned.