Investment banks and their
corporate clients have long nurtured close ties, which often include
having key executives serve on each other's boards. It has been called
"having a relationship."
In today's supercharged atmosphere of corporate scandals, when there
are demands for boards of directors to be totally independent, those
relationships run the risk of being called something else:
Such is the potential of the chummy relationship between eBay Inc. and
Goldman Sachs. Meg Whitman, chairman and chief executive of eBay, the most
successful Internet company, is also a director on the board of Goldman
Sachs, by many accounts Wall Street's most prestigious bank.
Last week, eBay announced it would acquire PayPal Inc. for $1.5 billion
in stock. It isn't too surprising to find that eBay chose Goldman Sachs as
its banker on the deal. (Morgan Stanley is advising PayPal.)
There's nothing illegal about the arrangement between eBay and Goldman,
but some corporate governance experts believe such arrangements have the
potential for trouble down the road. And there are several proposals,
including one at Nasdaq, that seek to ensure board independence.
For good reason, argue some bankers. "Goldman Sachs has the ability to
significantly influence both eBay's condition and Meg Whitman's personal
wealth through its provision of financial services, its trading activities
and its analyst coverage," said Gary Lutin, an independent investment
banker who has led investor initiatives for corporate control and
reporting. "Under the circumstances, Ms. Whitman would need to manage the
relationship in the context of her responsibility to the interests of eBay
and her own wealth. I don't see how that can be done in any way that can
be consistent with the director's fiduciary duties to the shareholders of
Some believe Goldman, however, is unlikely to let the relationship
influence it. "It would be a very expensive way for Goldman Sachs to
ensure business by using one of its board slots to buy investment banking
business by putting the CEO of eBay on their board," said Samuel Hayes,
Jacob Schiff Professor of Investment Banking Emeritus at the Harvard
When it comes to Whitman, he thinks the situation is a bit trickier.
"It becomes necessary, however, for eBay to demonstrate that they are
getting as good a deal from Goldman as they could have gotten from
somebody else," explained Hayes.
"Goldman Sachs is arguably one of the best one or two firms on Wall
Street," he continued. "It would be hard to criticize eBay for using
Goldman unless [the company was] getting a set of terms that was not
competitive. It would be important to the shareholders that the management
demonstrate that the terms were competitive."
An eBay spokesman defended Whitman's board position, saying that "she
carefully considered all possibilities that may develop should she accept
the position, and came to the decision that she could competently carry
out her responsibilities to each company without compromising either
A Goldman Sachs spokeswoman said that the firm has a longstanding
relationship as a strategic adviser to eBay that predates Whitman's board
appointment. "We have strict guidelines around conflicts and there is
adequate proxy disclosure around relationships," she added. Whitman joined
Goldman's board in October, 2001.
Goldman's work for eBay goes back to 1998, when it was chosen as the
lead underwriter for eBay's $72.5 million initial public offering. In 1994
it led a follow-on offering of eBay stock that raised $1.25 billion,
according to Thomson. EBay used Morgan Stanley once, when it acquired
Internet Auction Co. Ltd. for $51 million in 2001, but returned to Goldman
for the PayPal acquisition.
In addition, Goldman's equity analyst Anthony Noto covers the stock.
That, said one banker, could potentially be troublesome for Goldman. "If
Goldman Sachs is making a market and providing analyst coverage that
influences Meg Whitman's options package, and if the analyst downgrades
her stock and she loses $100 million, how ugly is she going to get on the
board? This is a problem with all financial services businesses," he said.
Bankers often serve on corporate boards, and corporate officers serve
on bank boards. When Salomon Smith Barney got a lead role in the largest
IPO ever-the roughly $10 billion IPO for AT&T's wireless unit, bankers
noted that AT&T's CEO Michael Armstrong was on Citigroup's board, and
Sanford Weill, Citigroup's chief executive, was on the board of AT&T.
"It's not illegal or against any SEC or Nasdaq rules for an individual
to sit on the board of a company that does business with your own
company," said Paul Hodgson, senior research analyst with the Corporate
Library, a corporate governance advocacy organization based in Washington,
However, he added: "Those companies with the best corporate governance
standards would request that either there were no business relationships,
or if there were, that there would have to be prior approval from the
board of the corporation." Hodgson added that the companies would have to
reveal the business relationship in a proxy statement between the CEO and
the company that does business with them.
But disclosure or not, some corporate governance experts think that
such a relationship could potentially cloud objectivity.
"It used to be that if one person had two masters, that's bad business.
If I'm a shareholder in either one of those firms, I would be nervous,"
said Mark Rubinstein, a finance professor at the University of California
at Berkeley. "There may not be any conflict at the moment but [it] may
Copyright 2002 by The Thomson Corporation
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