Citigroup Shareholders Say No on Pay
In 2012, Citigroup’s shareholders shocked the bank’s managers by voting “no” on a
pro-posed $ 15 million pay package for CEO Vikrim Pandit. In a so- called say- onpay referendum, mandated by the new Dodd- Frank Act, a solid majority— 55
percent— of shareholders withheld approval of the compensation package. Although
the vote was not binding, it clearly signaled to Citigroup’s board and CEO that
shareholders were unhappy. “Here we have the majority of shareholders indicating
frustration with the overall level of compensation for executives,” said a
representative of the labor federation AFL- CIO. “If it can happen at Citigroup, it can
happen anywhere.”
The target of this rebuke, Citigroup Inc., often called simply Citi, was a leading global
bank. Citi had been formed from a series of financial megamergers, culminating with
one with Travelers Group in 1998. At its core was a bank that served retail customers
at 4,600 branches in the United States and around the world. Citigroup also served
businesses and other institutional clients, providing investment banking, brokerage,
and lending services. A separate unit called Citi Holdings, established after the
financial crisis, included various unwanted assets that Citi was trying to divest. The
bank was known worldwide by its logo: the word “citi” in blue lower- case type
against a white background, with a red eyebrow connecting the two i’s.
During the financial crisis, Citi had had a near- death experience. Like many other
banks at the time, Citi had purchased mortgages and other consumer loans and
repackaged them into securities called collateralized debt obligations, or CDOs. It
both sold these to investors and traded them for its own accounts— eventually
acquiring over $ 40 billion worth of the risky instruments. Initially, the strategy was
highly successful. But the game began to unravel in 2007, as the value of the CDOs on
Citi’s books began to fall, and the firm was forced to announce billions of dollars of
write- downs on bad assets. As the crisis deepened in late 2008 and 2009, the U. S.
government provided Citi with a series of multimillion-dollar cash infusions in an
effort to stave off total collapse of the bank. Since then, Citi had struggled to recover,
gradually divesting itself of its risky assets and paying back its government loans.
Under Section 951 of the Dodd- Frank Act— passed by lawmakers in response to the
financial crisis— public companies were required to give shareholders an opportunity
to cast advisory votes at least once every three years on the compensation of top
executives. (Companies with a market capitalization below $ 75 million were exempt
until 2013.) The Council of Institutional Investors strongly supported this provision,
saying that say- on- pay votes provided boards with useful shareholder feedback and
could serve as a “starting point for dialog on excessive or poorly structured executive
pay.” In 2011, the first year Section 951 was in effect, shareholders approved most
compensation packages; say- on- pay resolutions won, on average, 92 percent support,
and were rejected outright in only about 2 percent of elections.
The executive pay package shareholders were asked to vote on at Citi was complex.
For 2011, Pandit was awarded a base salary of $ 1.7 million and a cash bonus of $ 5.3
million. At the time of the vote, Pandit had already received these payments. The
remainder of the $ 15 million package was to be paid over the following four years,
partly in stock and partly in cash. Neither his deferred compensation nor his job was
guaranteed.
In its proxy statement, the board defended its proposal by noting that Pandit, who
had taken over as CEO in late 2007, had “led Citi’s return to profitability and . . .
positioned the company for future growth.” It pointed out that the bank’s net income
in 2011 was $ 11 billion, an increase of 4 percent over the prior year, and that the
bank had enjoyed eight consecutive quarters of profitability. Citi had repaid its
government loans. Moreover, the board noted, much of the compensation was
deferred and subject to meeting performance targets. Although they did not mention
it in the proxy statement, directors were certainly well aware that Pandit had drawn a
salary of just $ 1 a year in 2009 and 2010, reflecting Citi’s precarious state.
But many shareholders— including several large institutional investors— disputed
the board’s logic. Two proxy advisory firms, Institutional Shareholders Services (ISS)
and Glass, Lewis and Co., recommended that their clients vote “no” on Citi’s pay
proposals, citing the misalignment of pay with shareholder returns. Several big public
pension funds and institutional asset management firms agreed and cast their votes
accordingly. Their main complaint, said a representative of CalPERS, the California
public pension fund, was that “the bank has not anchored rewards to performance.”
The bank’s shares had declined more than 90 percent since 2006, and Citi had
recently failed a “stress test” by the Federal Reserve to see if the bank had sufficient
reserves to withstand a severe downturn. An analysis by Forbes ranked Citi’s
performance in the bottom three of 17 U. S. banks.
After the vote, the bank’s chairman called the shareholder rejection “a serious matter”
and said the board would listen to the shareholders’ concerns. The directors’ options
were limited, however. They could either ignore the vote or change the CEO’s
compensation package. The latter course was complicated, however, because about $
7 million had already been paid out, and most observers thought Pandit was unlikely
to give back his earnings voluntarily. The board also faced a risk of litigation. At
several other firms, no- on- pay votes had been followed by shareholder lawsuits
charging that the board had wasted their money on excessive compensation. Because
the Dodd- Frank Act was so new, legal precedents were few, and the outcome of such
lawsuits difficult to predict.
“It’s time to roll up your sleeves, go back to the drawing board and come back to
share-holders with long- term performance targets, risk- adjusted, that really make
sense,” declared a representative of CalPERS.
Sources: “Citigroup’s CEO Rebuffed on Pay by Shareholders,” The New York Times,
April 17, 2012; “Citigroup Has Few Options After Pay Vote,” The New York Times,
April 18, 2012; “Citi Cleans Out Closet,” The Wall Street Journal, October 4, 2011;
“Citigroup Investors Reject Pay Plan,” The Wall Street Journal, April 17, 2012;
“Citigroup Shareholders’ Vote on Exec Pay Sends a Message,” Los Angeles Times,
April 18, 2012; PBS NewsHour, “Citigroup Shareholders Assert Say Over CEO’s Pay,”
April 18, 2012, at www.pbs.org/newshour; “Enhanced Investor Protection after the
Financial Crisis,” testimony of Anne Simpson, Senior Portfolio Manager Global
Equities, CalPERS, before the U. S. Senate Committee on Banking, Housing, and
Urban Affairs, July 12, 2011; and Institutional Shareholder Services, “2011 U. S.
Postseason Report,” September 29, 2011. Citigroup’s website is at www.citigroup.com;
its proxy statements are available in the investor relations portion of the site.
Discussion Questions
1. Do you agree with the provision of the Dodd- Frank Act that mandates advisory
share-holder votes on executive compensation? Why or why not?
2. What are the arguments for and against the proposed executive compensation
package at Citigroup? Do you agree or disagree with the proposed package, and why
or why not?
3. What were the interests of institutional shareholders in this matter, and why did so
many of them vote against the proposed package? If you were an individual
shareholder, how would you have voted?
4. What do you think the board of directors should do now that a majority of
shareholders have rejected the proposed pay package?
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