Saturday, April 21, 2012

Citigroup: What led to the law suit ?

This year’s annual shareholders meeting of Citigroup turned into a public rebuke session when the shareholders voted to reject the executive’s salary package. In the current social and economic environment when banks and other financial institutions are being criticized over the financial crisis, it appears that Citigroup has made an awful decision. 

You might have already watched Michael Moore's brilliant work Capitalism: A Love Story or Matt Damon's Inside Job or Michael Ruppert's Collapse. Consumers, and in this case the shareholders, are now more educated about the inner workings of  financial institutions and giant corporations than ever before. 

The (historic*) board meeting was held on 20th April, chaired by the Chairman of Citi, Mr Richard Parsons. The compensation plan was forwarded on the table and got rejected by 55% votes. This was Mr Parson’s last meeting as the chairman of the board who is now retiring.    

The “Say-on-Pay” provision of the Dodd-Frank Act signed by President Obama on 21st July, 2010, requires the Citigroup to take advice on their executive’s compensation packages from their shareholders. The shareholders’ role is only advisory but a ‘NO’ vote sends a clear and strong message to the executives. The board can either accept or reject the shareholders’ advice but either way it is turning out to be a major PR nightmare for the bank with its CEO Mr Vikram Pandit at the center.  

Two years ago when “Say-on-Pay” provision was first introduced, it was criticized in some circles on basis of its advisory nature. It was originally felt that since “Say-on-Pay” vote is non-binding, therefore it might not have any major impact on the board’s decisions. This has now been proven wrong. “Say-on-Pay” can, even in its advisory capacity, create immense public and shareholder pressure on the board members.

The investors feel that Mr Pandit’s compensation should be tied more closely with the bank’s performance. The compensation packages of Citi’s executives are designed in such a way that they allow them to earn millions if modest targets are achieved. 

Mr Parsons, the ex-chairman of the board feels that the compensation is already tied with performance and is more quantitative than qualititative. He thinks that the board members failed to explain its justification and the details of the package properly to the shareholders therefore they gave a negative advice.

The Institutional Shareholder Services, a compensation analyst representing the shareholders, have advised to reject Mr Pandit’s compensation package on grounds of its enormous size. In 2011, Mr Pandit received $15 million in salary and bonuses plus $34 million in one-time retention award. The group’s performance in the last five years has been dismal with shares plummeting as much as 90 percent. In 2011 alone, the shareholder returns decreased by 44 percent and Citi failed the Federal Reserve’s stress test. In light of the bank’s current results, the shareholders feel that Mr Pandit’s remuneration package is not justified.

Mr Pandit, on the other hand, has been working on $1 per year salary for the past three years but his compensation package has remained in millions. In fact, he was the 45th highest earning CEO in 2011 (Equilar’s report). He had an investment, a hedge fund called Old Lane that Citi Group acquired against $800 million. Out of this, $80 million went straight into Mr Pandit’s pockets. 

Although the shareholders have an advisory role on “Say-on-Pay”, they can still file a law suit if their demands are not met. Under normal circumstances such a law suit would fail but it would cost money, Citigroup’s money to defend.

As expected, the law suit came. IT was filed by shareholder Stanley Moskal on Friday in Manhattan. Mr Moskal claims that the CEO Mr Pandit and other directors were paid more than $54 million in compensation in 2011, which is in breach of their fiduciary duties. The money is already in the executive’s pockets so it is highly unlikely that the law suit will yield a positive result. 

*Historic because this was the first time that "say-on-pay" received a rejection in a board meeting of a major global financial institution. This has never happened before and hopefully this wont be the last. 

Half-Bridge Updated (Return to main page)

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