- While the details of the latest charity initiative are still under discussion, the firm's executives have been looking at expanding their current charitable requirements for months and trying to understand whether such gestures would damp public anger over pay, according to a person familiar with the matter who did not want to be identified because of the delicacy of the pay issue.
Apparently Bear Stearns had done something similar in the past, requiring the top 1000 employees to contribute 4% of their compensation to charity.
The specifics have apparently not yet been determined. Nonetheless, unlike the stock bonuses, the approach effectively reduces the amount of compensation paid to each employee.
Goldman could have considered reducing the amounts paid in compensation and contributed the saved amounts directly to charity. The financial institution in fact added an additional $200 million to its charitable foundation. But making direct contributions would have potentially violated state law.
Corporations are obligated to profit maximize. Some portion of the company's profits can be donated to charity. Companies may do so, however, only if there is a business benefit. See RMBCA § 3.02(15)(permitting "donations, or do any other act, not inconsistent with law, that furthers the business and affairs of the corporation."). For modest amounts of contributions, the business benefit can be vague, with enhanced reputation in the community enough of a justification.
For more significant amounts, however, there must be a sufficient nexus to the business of the company. Had Goldman chosen to donate 5% of the amount left aside for compensation, an amount that would probably exceed $1 billion, it would have needed to show some type of meaningful connection to its business. Any failure to do so would likely generate lawsuits from shareholders alleging that the board had failed to engage in the required profit maximization.
By giving the funds to employees but requiring them to make charitable contributions, Goldman likely ducks the legal issue. Charities will receive the same amount but employees get to decide the charities and get to receive the appropriate tax benefits. Moreover, employees obtain the psychic benefits that come with the contributions. In other words, while they cannot spend the funds on their own needs, they nonetheless benefit from the payments.
The Goldman approach does establish that employees could be paid less (their compensation less the amount required to be given to charity). It is not far from an admission that the company is overpaying employees. Moreover, it is nothing permanent; the practice could be discontinued at any time. Finally, the approach will likely result in only modest reductions in compensation (Bear Stearns required contributions of 4%).
The Goldman approach may be a modest improvement (assuming the final plan is a meaningful one) but it is likely to be too little, too late. A comprehensive federal solution is still necessary.
