Striking a conciliatory tone, Blankfein acknowledged recent mistakes by Wall Street executives and the public anger that has followed. “To begin with an obvious point, much of the past year has been deeply humbling for my industry,” he said. “We held ourselves up as the experts, and the loss of public confidence from failing to live up to the expectations that we created will take years to rebuild. Worse, decisions on compensation and other actions taken and not taken, particularly at banks that rapidly lost a lot of shareholder value, look self-serving and greedy in hindsight.”

For the most part, though, Blankfein focused on the lessons learned and the need for cautious reform. “Dynamic regulation is needed in capital, credit, and underwriting standards and that there should be some degree of regulation of hedge funds and private equity,” he said

But Blankfein was clear that regulators should proceed with caution and raised the idea that comprehensive regulation could go too far and lead to inflexible and inefficient markets. “As the saying goes, you don’t go shopping when you’re starving,” said Blankfein. He said here is a tendency to put too much emphasis on what has just happened and that there is a danger of policy makers passing rigid regulation for the 100-year storm, he said.

Protesters twice disrupted his address. Shortly after he began speaking, two women walked up on the stage and unfurled a banner behind Blankfein that said: “We want our $$$$ back.” Blankfein shook one of their hands and then asked them to sit down and promised to address the issue during his speech. Later, during the question and answer period one of the women again walked up on stage and disrupted the event by shouting: “Why should taxpayers bail out the failure of Wall Street,” and chanting, “we want our money back.” Security officials physically removed the women from the room.

Blankfein seemed largely unfazed by the demonstration and while he said he didn’t think the tactics where productive, he did acknowledge public anger directed at Wall Street executives. “I want to address it. It’s real and visceral, and felt by most people in the country, maybe everybody in the country and I don’t exclude myself from that.”

The Goldman CEO again addressed the idea that the firm would return the $10 billion in TARP money that it received. “The minute that an institution is allowed to return the money and is capable of returning the money while still carrying out its obligations and its role in the capital markets effectively, then it should do it that minute,” he said. “It’s not a choice, it’s an obligation to the taxpayers.”

The focus of Blankfein’s discussion, however, was on compensation, regulation, and risk management. He suggested a number of changes to Wall Street compensation plans, including only junior employees being paid with high levels of cash and that the percentage of pay awarded as company stock increase with a worker’s total compensation. He said some pay should be held as deferred stock until after retirement and that he favored clawbacks to retrieve ill-gotten gains.

On the topic of risk management, Blankfein said, “Complexity got the better of us. The industry let the growth in new instruments outstrip the operational capacity to manage them. As a result, operational risk increased dramatically and this had a direct effect on the overall stability of the financial system.”

Blankfein’s list of remedies to fix the problems on Wall Street, included careful regulation, changes to compensation practices, and improved risk oversight. “We have to safeguard the value of risk capital, which is at the heart of market capitalism, while enhancing investor confidence through meaningful transparency, effective oversight and strong governance. But, there should be no doubt: Markets simply cannot thrive without confidence.”

The Council of Institutional Investors released a statement voicing their discontent with the “perverse incentives that rewarded executives for driving up business with cant regard for the soundness and long-term benefit of those transactions.”

CII also noted that it strongly opposes companies that are compensating for lower executive pay by adjusting undervalued stock options, granting more stock or lowering targets for performance-based compensation.

“Investors across the board have taken a huge financial hit,” said Joe Dear, chair of the Council of Institutional Investors and executive director of the Washington State Investment Board. “At a time when the retirement assets of millions of ordinary Americans are becoming ever more skeletal, boards should not be fattening the pay packets of executives.”

CII believes that executive compensation is a critical and visible aspect of a company’s governance and pay decisions are one of the most effective decision shareholders can have a voice in. As companies continue to be bailed out by the U.S. government, taxpayers also are included in the mix.

CII has endorsed a set of best practices for executive pay policies and disclosures:

• Companies should provide full disclosure of the performance goals used to determine annual and long-term incentive compensation. Such disclosure helps market participants evaluate whether pay practices encourage or mitigate against excessive risk-taking.

• Executives should own a meaningful amount of the company’s common stock. A significant portion of their pay should be equity-based and they should be required to hold it for a period beyond their tenure.

• Companies should provide shareowners an annual, advisory vote on the compensation of senior executives. Such a vote would give boards fast, useful feedback about investors’ views of the company’s compensation practices. It might also deter against over-the-top pay plans at underperforming companies.

• Executives who leave a company as a result of poor performance—whether they are terminated, resign under pressure or the board fails to renew their contract—should not be entitled to severance payments.

• Companies should have clawback provisions for recapturing unearned bonus and incentive payments to senior executives.

• Compensation advisors and firms retained by the board should be independent of the client company, its executives and directors.

The project will run tandem to a commission the CII agreed to form with the CFA Institute. Expect leading CII funds to advocate for at least three market-wide changes: easier shareowner rights to nominate corporate directors (”access”), say-on-pay votes to align CEO pay with performance, and a swift end to broker voting, which can skew ballot outcomes, according to GPW.

The voice of the shareowner hasn’t been heard much in the scrum over how to rescue U.S. financial markets. That’s partly because investors as a group hve never developed heavyweight political clout. It’s also because the CII,, the chief shareowner group in the U.S., is a jigsaw of corporate, labor, and civil pension funds that don’t always agree with each other. But the crisis has galvanized the CII into action.

At its semi-annual meeting in Chicago, some council members also proposed issuing an urgent collective letter on the financial bailout to ensure that the shareowner perspective forms part of political and regulatory agendas in Washington.

Large funds such as the California Public Employees’ Retirement System (CalPERS) are planning to coordinate its own separate efforts.

The CII also took its first major steps to globalize. Its international committee decided in Chicago to build website profiles of issues, groups, and contacts in major markets as a resource for CII meetings. And it is considering a formal liaison with the International Corporate Governance Network, which the CII helped to create 14 years ago.

Eventually, the CII may engage individual companies in other markets on governance failures, as it does at home. The international panel is headed by Florida State Board of Administration Mike McCauley and Sara Lee general counsel Margaret “Peggy” Foran.

As much as 85 percent of all shares in U.S. public companies are held in “street name,” meaning they are held of record in bank or brokerage accounts for the ultimate owners. NYSE rules allow brokers to decide how to vote shares on “routine” proxy proposals—including uncontested director elections—if the owner hasn’t provided voting instructions at least 10 days before a scheduled meeting. Experts estimate that brokers typically vote about 20 percent of street-name shares.

Council of Institutional Investors (CII) and other shareholder advocates argue that since brokers almost always side with the management slate, the broker vote is akin to stuffing the ballot box. After much argument, CII convinced the NYSE to join the fight. In the fall of 2006, the NYSE submitted a plan that would redefine director elections as “non-routine,” which, in effect, would eliminate the broker vote.

The SEC hasn’t responded, although Chairman Christopher Cox and staffers have said repeatedly that the agency intends to deal with the matter.

The clear implication is that the SEC is considering this so-called “mirror voting” approach as an alternative to the wholesale elimination of the broker vote.

The issue has become all the more important over the past two years due to the spread of majority voting rules. Today some twothirds of S&P 500 companies have adopted such a standard, which means many more directors now could lose their posts if they can’t count on the 20-percent broker vote.

Behind the scenes, the SEC has been moving toward a compromise solution. In a May exchange of letters with CII, the Commission said it was waiting to hear from the NYSE’s Proxy Working Group about an effort several major brokerage firms made in 2007 to vote the uninstructed shares of their customers in proportion to actual votes received from retail customers. The clear implication is that the SEC is considering this so-called “mirror voting” approach as an alternative to the wholesale elimination of the broker vote.

While mirror voting has plenty of supporters, CII is currently not one of them. It argues that it won’t stop the abuse, since management or friendly outside investors would still be free to transfer their shares into broker accounts and amplify their voting power. The Council argues that if shareholders don’t vote their shares, they shouldn’t be voted by anyone else, no matter what method is used.

Despite the objections of CII, now that the Commission is back to full strength, it seems likely that, at the very least, the mirror voting compromise will be on the table.