Tuesday, April 21, 2009

Citigroup’ Shareholders Wondering When Treasury Ousts Board

Citigroup Inc.’s board will likely survive a shareholder vote at today’s annual meeting, even after overseeing $28 billion in losses and a 77 percent stock decline last year. The U.S. government may be less forgiving.

The Treasury Department, which will become the biggest shareholder in New York-based Citigroup when the bank converts as much as $52 billion of preferred stock into common shares as soon as next month, may order the resignations of some long- serving board members to show they’re accountable, according to Peter Sorrentino, a senior portfolio manager at Cincinnati-based Huntington Asset Advisors, which has about $13.3 billion under management, including 1.5 million Citigroup shares.


“There has to be a cleaning of all that was at Citigroup,” Sorrentino said. “Anyone who was involved with the board in the lead-up to the crisis is tainted.” Board members who “sanctioned the risks that were taken and the business practices followed” will likely be replaced by the government by the end of the year, he said.

A government-mandated board overhaul is needed to boost the company’s stock price and raise shareholder confidence that the bank’s management won’t be hamstrung by decisions about subprime-related mortgages made under the current board, said William Smith, founder of Smith Asset Management Inc. in New York who holds 200,000 Citigroup shares and has been critical of management since early 2007.

The board is “like a cancer,” Smith said. “Until there’s a clean slate and a fresh perspective on the board and in management, Citigroup will trade at a discount.”

Geithner’s Move

Treasury Secretary Timothy Geithner said on April 5 that he’s prepared to oust executives and directors at banks that require “exceptional” assistance. Citigroup, led by Chairman Richard Parsons, 61, and Chief Executive Officer Vikram Pandit, 52, has already taken $45 billion of taxpayer money and may need more after the Obama administration reveals on May 4 how the 19 largest U.S. banks fared on stress tests being conducted by the Federal Reserve, according to Christopher Whalen, a managing director at bank-research firm Institutional Risk Analytics in Torrance, California.

Whalen says Citigroup, the third-biggest U.S. bank by assets, will be “ranked as one of the lowest” in the stress tests, which are designed to gauge whether lenders have enough capital to withstand a continuing economic crisis.

“The government needs to replace management at Citi,” Whalen told Bloomberg Television last week. “They need to clean out the board. It’s astounding to me that we haven’t done this already.”

Citigroup Chief Financial Officer Edward “Ned” Kelly wouldn’t discuss the tests in an interview last week. Parsons and Pandit declined requests for interviews.

First-Quarter Profit

The bank reported a $1.6 billion first-quarter profit on April 17, thanks to trading gains and an accounting benefit for distressed companies. Since then, the stock has tumbled 27 percent to $2.94 in New York composite trading on concern that the company will return to losses as mortgage and credit-card delinquencies rise.

Four proxy-advisory groups, including New York-based RiskMetrics Group Inc.’s ISS Governance Services and San Francisco-based Glass Lewis & Co., have called for the removal of directors. The American Federation of State, County and Municipal Employees, which oversees more than $1 trillion in pension assets on behalf of 1.6 million members, is campaigning against six current and former members of the board’s audit and risk management committee.

‘Hall of Shame’

“If there were a board Hall of Shame, Citi’s would be in it,” said Richard Ferlauto, AFSCME’s director of corporate governance and pension investment. “The board has failed, and the directors have contributed to the lack of oversight.”

Washington-based AFSCME opposes the re-election of Michael Armstrong, a former AT&T Inc. CEO; Alcoa Inc. Chairman Alain Belda; John Deutch, a former U.S. Central Intelligence Agency director; Andrew Liveris, CEO of Dow Chemical Co.; Xerox Corp. CEO Anne Mulcahy; and Judith Rodin, president of the Rockefeller Foundation in New York. RiskMetrics has advised voting against Armstrong, Belda, Deutch and Mulcahy. Glass Lewis urges shareholders not to re-elect all six directors opposed by AFSCME and to vote against Parsons, a former CEO of Time Warner Inc. who has been on the Citigroup board since 1996.

“Despite the fact that the board has many incumbent directors who have been successful in their respective fields and have been on the board for some time, their track record taken as a whole is dismal given that the company is currently surviving on federal assistance,” RiskMetrics said in an April 9 report.

Running Unopposed

Citigroup board members didn’t return calls or declined to comment. In an e-mailed statement, Citigroup spokesman Jon Diat said the bank’s board of directors and audit committee have “diligently carried out their responsibilities during one of the most severe market downturns in decades.”

Parsons, Pandit and the 12 other directors are expected to prevail in their re-election bids, shareholder advocates say. That’s because they are running unopposed, and brokerage firms and money managers tend to go along with the company’s slate, the advocates say.

A “yes” vote only puts off the inevitable, William Fitzpatrick, a financial-industry analyst at Optique Capital Management in Racine, Wisconsin.

“The government’s doing everything it can to convey the message that the financial system is stabilizing,” said Fitzpatrick, whose firm oversees $1 billion and sold its 400,000 Citigroup shares last September. “If turnover at the executive level and board level can help convey that message to the general public, they’re going to go down that route, and they have the authority to do that.”

Bank of America

Citigroup isn’t the only target of shareholder ire. Last week RiskMetrics recommended voting against Bank of America Corp. Chairman and CEO Kenneth Lewis, lead director Temple Sloan Jr. and four other board members seeking re-election.

The board of Charlotte, North Carolina-based Bank of America, which also got $45 billion from the government, “failed to provide adequate oversight of management,” according to RiskMetrics. The bank’s shares have tumbled 79 percent in the past year.

Parsons replaced Winfried Bischoff as chairman of Citigroup in January. He was head of the bank’s personnel and compensation committee during the four-year tenure of CEO Charles O. “Chuck” Prince, who was ousted in November 2007, as the first of the bank’s subprime-mortgage losses surfaced.

Prince’s Perks

As head of the compensation committee, Parsons approved giving Prince a $10.4 million parting bonus and five years of perks that included a free office, secretary, car and driver worth $1.5 million a year. He also led the committee that searched for Prince’s replacement, choosing Pandit in December 2007. Parsons was re-elected to the board last year with 69 percent of votes in his favor, the lowest among 14 candidates. Three months after the vote, he was promoted to lead director.

Making Parsons chairman after he received the lowest number of votes illustrates that Citigroup’s board “just doesn’t get it,” said Dan Pedrotty, director of investment at the AFL-CIO, the largest U.S. labor federation.

Parsons, who was CEO of Dime Savings Bank of New York from 1991 to 1995, gets credit as one of only two sitting directors with banking experience, according to RiskMetrics. The other is Robert Ryan, 66, who joined the board and audit committee in 2007 and was a vice president at Citibank from 1975 to 1982.

‘Governance Concerns’

Parsons told RiskMetrics that the board “has taken steps to resolve its governance concerns,” including hiring directors with finance and banking experience and replacing the executive chairman with one from outside the company, RiskMetrics said in its report.

Bischoff and three other board members, including former Treasury Secretary Robert Rubin, announced earlier this year they would be stepping down. Four outside directors have been nominated to replace them. They are Jerry Grundhofer, a former CEO of U.S. Bancorp; Mike O’Neill, a former CEO of Bank of Hawaii Corp.; William Thompson, a former CEO of Pacific Investment Management Co.; and Anthony Santomero, a former University of Pennsylvania finance professor who served as president of the Federal Reserve Bank of Philadelphia from 2000 to 2006.

“The slate of new directors coming on is quite impressive,” said Barclays Capital senior analyst Jason Goldberg in New York, who rates Citigroup shares “overweight.” “These are definitely the real deal.”

The board needs more like them, said Robert McCormick, chief policy officer at Glass Lewis.

“More fresh perspective is warranted,” he said.

‘Surgical Strike’

Instead of opposing the whole board, AFSCME is making what Ferlauto calls “a surgical strike” at the audit and risk management committee.

“We’re hesitant to launch a campaign that would lead to an unknown situation in which the board would be rejected and there would be no leaders left at the company,” Ferlauto said.

Deutch, 70, a nuclear-security specialist at Massachusetts Institute of Technology who was a CIA director under President Bill Clinton in the 1990s, has served on the Citigroup board since 1996 and has been a member of the audit committee for 11 years. He replaced Armstrong as chairman of the committee in July.

Mulcahy shouldn’t be re-elected because she is overextended as CEO of Xerox and a director on more than three boards, RiskMetrics said. Norwalk, Connecticut-based Xerox has plummeted 67 percent since the end of 2007 to $5.36 in New York Stock Exchange composite trading.

‘Soviet-Style Voting’

Citigroup’s majority-voting rule requires directors to receive more than half of shareholder votes cast.

When board candidates get less than 75 percent of votes in their favor, that’s a “call for them to step down,” since they’re running unopposed, Pedrotty said.

“In this Soviet-style voting, where it’s vote for me or vote for no one, if a director can’t get that much they should resign,” he said.

Results may be disclosed after today’s meeting at the Hilton New York hotel, where both Parsons and Pandit are scheduled to field questions from investors.

Don’t look for any Citigroup board members to resign without the government’s nudge, said David Roberts, a former Northern Trust Corp. mutual fund manager who’s now principal of Harvest Investment Advisors LLC in Tallahassee, Florida. Citigroup was one of the 40 or 50 stocks among Harvest’s $15 million holdings until Roberts sold it in early 2008, he said.

“If you have a board of 12 members, and one or two resign, what they basically are doing is saying, ‘Blame me,’ and that’s not going to happen,” Roberts said. “They don’t accept responsibility. There’s just a fundamental lack of people stepping up and saying, ‘You know what? I made a mistake.’”