Ahead of Citi's annual shareholder meeting on April 21, three proxy advisory firms have advised shareholders to express their dissatisfaction with the performance of the bank's board and highlight compensation-related issues.
San Francisco-headquartered Glass Lewis gives Citi an "F" grade on its pay-for-performance model, observing that the US bank paid more compensation to its top officers than the median compensation at six large financial companies. "Overall [Citi] paid more than its peers but performed worse than its peers," notes Glass Lewis.
Glass Lewis believes Citi board members on the firm's compensation committee did not rectify practices to appropriately link pay with performance. Coupled with the losses Citi has booked due to the subprime market, Glass Lewis concludes shareholders should hold certain directors responsible for a lack of oversight by the board, especially with respect to risk controls and compensation practices.
Earlier this year Citi issued principles governing compensation. According to the principles, compensation will be based on both individual and company performance and on both financial and non-financial information; both future and past performance will be taken into account and executive compensation will include a portion which vests based on future performance; a clawback provision will enable the firm to recover executive compensation which is proved to have been based on inaccurate financial or other information; and the top five executives will not be entitled to severance pay.
Glass Lewis is unconvinced, commenting: "We remain somewhat sceptical about the company's overall compensation practices."
Glass Lewis finds that Citi's disclosure of its compensation policies and procedures is marginally acceptable, citing for example the fact that the bank has announced that the amount that went into bonus pools is down 43% for the senior leadership committee and 57% for the management executive committee, but has not disclosed the specific amount allocated to such bonus pools for 2008.
Glass Lewis concedes that board members may be unable to understand all the risks of Citi's businesses, given the size, complexity and diversity of the firm and concludes that this lends "support to some assertions that the company may be better off separated into its constituent parts". But despite the concession granted to the board, the advisory firm remains concerned about the inability of Citi's board to provide oversight over risk controls, commenting: "We wonder whether the board was even cognisant of the deficiencies in the company's risk controls as the company was taking on greater risk."
Glass Lewis recommends shareholders to vote against the re-election of seven board members: Michael Armstrong, former chief executive officer of AT&T; Alain Belda, chairman of Alcoa; John Deutch, former director of the Central Intelligence Agency; Andrew Liveris, CEO of Dow Chemical; Anne Mulcahy, CEO of Xerox; Judith Rodin, president of the Rockefeller Foundation; and recently appointed independent chairman Richard Parsons.
It also recommends shareholders to vote against the executive compensation proposal for 2008 to signal dissatisfaction over how Citi has structured the proposal and how it has failed to adequately link pay with performance.
Another firm that disapproves of Citi's executive compensation practices is RiskMetrics Group. The Manhattan-headquartered firm specifically cites the personal use of the corporate aircraft by CEO Vikram Pandit, a $126,256 ground transportation allowance paid to chief financial officer Gary Crittenden, and a $148,914 tax gross-up on perquisites paid to Asia CEO Ajaypal Banga, pursuant to Citi's expatriate program. (The firm notes that Pandit has reimbursed the firm $171,808 for his use of the plane.)
"Personal use of corporate aircraft, excessive automobile allowance and tax gross-up payments are not good pay practices," observes RiskMetrics.
RiskMetrics also delves into the US bank's history to corroborate its point that recently Citi "has built a troubling record in the areas of risk management and compliance". Among other things it cites Citi's participation in structured transactions involving Enron in 2003 and the fact that local regulators in Japan closed the bank's private banking unit for failing to guard against money laundering.
Changes in strategy, board and management at Citi during the past year took place in response to, or coincided with, government rather than shareholder pressure, finds RiskMetrics.
"The audit committee and the board have chronically failed to address the company's risk management and compliance issues despite regulators' repeated efforts to warn of and resolve the firm's regulatory problems as well as enforce compliance measures," states RiskMetrics.
RiskMetrics also suggests shareholders vote against the re-appointment of Armstrong, Belda, Deutch and Mulcahy.
Virginia-headquartered Proxy Governance takes the debate one step further, saying what happened to Citi and its peers is a systemic breakdown and raises the question of whether the recent corporate governance debate has focused on the right set of issues. Proxy Governance suggests compensation, and its link to performance, has begun to dominate questions about board oversight.
"While compensation issues clearly remain explosive, the collective mis-steps of leading financial companies have sorely tested the faith of shareholders and raise the question of whether other critical areas of board responsibility should be receiving great attention -- most notably, strategic planning, succession planning and risk management," comments Proxy Governance with regard to performance across the industry.
Proxy Governance benchmarks Citi against a peer group of Bank of America, Bank of New York Mellon, Capital One Financial, Credit Suisse, Goldman Sachs, HSBC, J.P. Morgan, Morgan Stanley, Royal Bank of Canada and Wells Fargo. The firm comments that compensation paid to Pandit is 38% above the median paid to CEOs at peer companies and the average three-year compensation paid to vice-chairman Stephen Volk, and co-head of global markets James Forese as well as Crittenden and Banga is 51% above the median paid to executives.
Proxy Governance is recommending shareholders to vote against the appointment of Armstrong and Deutch in light of the long board tenure of the two and the lengthy terms they served on the audit and risk management committee, including during the years when Citi expanded aggressively into collateralised debt obligations (CDOs).
"Citi's board of directors has diligently carried out its responsibilities during one of the most severe market downturns in decades," says a spokesperson for Citi in Asia-Pacific in response to the statements issued by the proxy advisory firms. "The board also rotated committee chairs and members in July 2008. There is no basis for any recommendations against directors."