Citigroup Report
Citigroup
Disclosure: Alexander Krakovsky owns Citigroup stock
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Lemon Rating:
One juicy and one rotten lemon
There is nothing like a crisis to shake things up. Well…sort of.
First, the fire sale of Phibro to Occidental Petroleum, precipitated by the US Government as a majority shareholder, only emphasizes how state control of a business is bad in the long term… even if it fixed some short-term problems. The US government could not politically tolerate the bonus amounts even if they were not commercially objectionable, and the business itself was solid.
On the positive side, Citigroup added seven qualified board members since the crisis began: Jerry Grunhofer, Michael O’Neal, Anthony Santomero, William Thomson Jr., Diana Taylor, Timothy Collins, and Robert Ross. All have significant relevant banking and/or finance experience.
However, City has also swelled its board size from 14 on the 2008 proxy to the current 18 (17 intended to be re-nominated in 2010). One would think that the three board members, who will have departed by the 2010 meeting, are the least qualified. However, the only criterion under which directors have lost their posts was age and not qualification. Citi governance principles limit a director's age to 72 years old. All directors, who were not re-nominated so far, merely reached their 72-d birthday.
The CEO and the Chairman positions at Citigroup have been separate in practice for a couple of years, but this is not a rule that is explicitly stated in the bylaws or the charter. While the banking crisis will end, the governance crisis can resume anytime through the merging of the CEO and Chairman roles.
Citi also states proudly that it has adopted the majority voting rule in uncontested elections. However, read the bylaws closely: even if there is one shareholder-nominated candidate, all incumbent directors can be elected by plurality. This is not unusual, but does not make it right – what a great way to get around its own rule!
To Citigroup's credit, its board is not classified. All directors do stand for elections annually. However, the size of the board is at the full discretion of the board at any time. This year, Citi announced that seventeen board members would be nominated in 2010. However, it was silent on the board size in case there are challengers.
Citi also failed to adopt a special meeting provision, leaving the requisite percent of shares outstanding to call a meeting at 25%, despite a shareholder proposal to change it to 10%. Without the Government, it is virtually impossible to assemble 25% of the shareholder votes to call a meeting, rendering the current special meeting provision meaningless.
Citi does not have any supermajority provisions, which is generally good, except in Citi’s case, this give the US Government power to change the bylaws as it wishes.
Citi does not have an explicit “say on pay” provision. It is currently required to have “say on pay” under TARP. However, when TARP is repaid, "say on pay" goes away. This provision should be explicitly stated in the bylaws. Alas, it was rejected by the board last year.
The Company's web site shows all of its corporate documents with the exception of the articles of incorporation. It also does not display the qualifications of directors, but only their names and current positions. Documents for Citibank NA (a subsidiary) are intermixed with Citigroup documents, so be sure you are looking at the right company.
In all, Citigroup seems to make a good show of its corporate governance practices, but underneath it all, there is a lot of reluctance to make a solid commitment. The following improvements would contribute to shareholder value:
· USA should divest its stake as soon as practical.
· A special meeting should be callable with 10% of the vote.
· Board nominations should be strengthened and board size limited to prevent unqualified directors to linger.
· Shareholder proxy access to nominate directors and say on pay provisions should be adopted, regardless of future regulatory requirements.
· The Chairman and CEO positions should be split permanently by a provision in the bylaws. Even better, no current executives should serve on the board.
We believe that these potential improvements can greatly contribute to shareholder value. Because Citi has declassified its board, improved the board composition, adopted majority standard and separated CEO and Chairman Positions, its governance shortcomings deserve no more lemons than two. However, the obstacles in overcoming the shortcomings are great. Although State control initially improved the board composition and governance practices, it has already began creating its own problems. We expect the board positions to become tied to politics de-jure as they are in state-controlled companies in Europe. We also expect the commercial substance of further improvements to take a back seat to the lingering financial distress and National politics. Let’s hope that the company (and in this case the US Government) will squeeze these lemons. However, given the obstacles to further improvements, we believe that one of the two lemons is rotten. There is foreseeable potential to make some of the improvements (or “squeeze” one lemon), but not enough potential to go all the way.
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| Citigroup_12 03 09.pdf | 160.65 KB |
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