Wednesday, March 02, 2011

Gupta's Charges Latest Sign that Goldman's Board Too Cozy

By Eric Jackson03/01/11 - 04:35 PM EST

NEW YORK (TheStreet) -- The news that the Securities and Exchange Commission was charging the former head of McKinsey & Co., Rajat Gupta, with insider trading for tipping off hedge fund manager Raj Rajaratnam were shocking.

Gupta was a blue-chip business executive. McKinsey's corporate reputation as an adviser has been beyond reproach prior to this (although another lower-level McKinsey consultant was swept up in this sameGalleon probe earlier). He moved in rarefied corporate circles since leaving the top job at McKinsey.

Gupta had served as a corporate director forGoldman Sachs (GS_) and Procter & Gamble(PG_) and is also a board member of AMR(AMR_). He'd advised the World Economic Forum and the United Nations' Secretary General.

If Rajat Gupta is tipping off hedge fund buddies, an observer must ask: How pervasive is this kind of insider trading among other corporate executives and directors?

We will likely never know the full answer to that question, but I had previously criticized Goldman Sachs for allowing Gupta to serve on its board more than 18 months ago. I said the board was too cozy with old friends of Goldman and people who were ill-equipped to strongly question the strategy of the firm presented by CEO Lloyd Blankfein and COO Gary Cohn.

I said that Gupta was likely someone who had personally consulted for Goldman for years (for compensation, of course). Even though I thought that Gupta would try to fulfill his job as a director in a professional manner, any human would feel beholden to a former client (Blankfein and Cohn), especially in a role (as director) that brings good compensation and unspokenopportunities to invest in different opportunities that Goldman uniquely has access to (like the recent private investment in Facebook for example) and general prestige that would be associated with the job.

I also disliked that Goldman's board had five former or current CEOs who were also presumably former Goldman clients, including current ArcelorMittal (MT_) CEO Lakshmi Mittal, Colgate-Palmolive's(CL_) former COO, Lois Juliber, former chairman and CEO ofFannie Mae (FNM_) James Johnson, former CEO of Medtronic(MDT_) William George, and former Chairman and CEO of Sara Lee (SLE_) John Bryan.

They could also have a hard time saying "no" to Blankfein and Cohn, for the same reasons Gupta would.


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