Comments on Sandy Weill's Statements Concerning Citigroup

To public companies, activist investors might seem a bit confrontational. How else would they describe someone that is buying shares, trying to replace a board and sending an open letter to current directors citing their unreasonable behavior? But let's face it, many domestic companies are experiencing massive losses of assets and huge declines in stock market value, often due to the failure of top management. Someone needs to demand that directors’ act responsibly namely in the selection and supervision of management.

If shareholders are not allowed to hold poor boards and CEOs accountable, how can our companies compete? Who suffers? In a declining company, it's not only the CEO receiving huge severance that’s a problem, it’s also the thousands of employees that are fired due to mismanagement.

Citigroup is a good case in point. It wasn’t so long ago that everyone from branch managers to securities regulators were worried that Citi was on the path to global dominance. Now Citigroup is being forced, reluctantly, into intense cost cutting and the selling of assets.  Telegraph.co.uk has pointed out in "Arch critic calls for Citigroup to be broken up," that analysts believe a break up would be Citigroup's best option. What can be ascertained from Citi's dramatic change in fortunes?

A recent article published in the Financial Times entitled "Citi's Weill admits flaw in 2003 succession" may give us some insight. The article states that Sandy Weill, Citigroup's former chairman and CEO "acknowledged that the planning that led to the choice of Chuck Prince … was flawed and turned out not to be the 'right thing' for the company." Weill now believes that "the board should have fostered competition… rather than handing the job to Mr. Prince."

During Mr. Prince’s tenure, Citi’s shares decreased by 19%.  In January, Citigroup revealed that their full year profits were down 83%. 

Weill's criticisms were not wholly directed as an attack on Prince. He was criticizing the structure of the CEO succession process.  As reported in the Financial Times, Mr. Weil indicated that he had "… responsibility for working with the board in devising a plan of succession and I would not give myself very good grades on that."

The role boards play in selecting a CEO is the most fundamental function of the board. The critical nature of this task cannot be overstated. When a board puts a CEO in place it is choosing someone that will run the company, become its public face, select additional leadership to aid the CEO and influence the direction of the company. If the person is unsuccessful, board members have failed in their most essential task.

This is not unique to Citigroup. It is a universal concept. 

The problems underperforming companies face go beyond the CEO selection process. They also implicate a breakdown in keeping management accountable during their tenure. In Citigroup's case, one article reported Prince received $140 million even though the company’s stock price had weathered significant losses.  That's not including his retirement package: a reported $40 million.  I have one question. Why?

If the most affected financial institutions had the correct accountability checks in place they most likely would have maintained a stronger grip on risk management – not allowing themselves to become overleveraged or allowing individuals to overextend themselves with their mortgages.  In order to maintain good working order of a flailing monolith such as Citigroup, compensation must be tied with performance. Perhaps we could avoid a few of these layoffs if shareholders weren’t being forced to shell out millions to keep dysfunctional management in place.

A board of directors is at the heart of U.S. corporate governance. Yet directors are allowed to hide behind laws, like the so-called “business judgment rule,” even in cases where events have caused serious injury to the company. These directors compound the "moral hazard" created by these standards by rejecting calls for good corporate governance.

To speak directly to Sandy Weill’s point, I believe that an improved electoral system  for directors must be implemented to guarantee that shareholders have strong decision makers in place in the boardroom ---- decision makers that shareholders can trust to make sure the company is run efficiently by the best possible management team.

Who is responsible for making sure the board is populated with the right people? Shareholders. We need to take action and make our voices heard. We need to vote in corporate elections. But most importantly, to allow those votes to be meaningful, we need to remove the existing impediments to good corporate governance. We must eliminate barriers to an effective election process that have been erected by entrenched managements, compliant boards, state courts and legislatures, and law firms that are beholden to management. This will require a ground swell of support from shareholders. If our corporations are to prosper, and if our economy and shareholders are to thrive along with them, it is essential that we succeed.

Comments

[Milton R. Okun, M.D.]

Mr. Icahn:

Your comments (TV and blog) are true, refreshing, surprising and wonderful.

If I may draw a parallel to the world of medical/biologic Academia/research, it is dominated by the same types you describe as classical CEOs.

Medical/biologic research is dominated by dogmatists who claim cells replicate by mitosis-only. This is a major block to understanding differentiation/stem cells/cancer, etc. and why the huge amounts spent on cancer research have essentially gone down the drain.
(See my website: www.cellgroupbulletins.com , especially July 2008 bulletin.)
I look forward to your reply.
Milton R. Okun, M.D.
115 Forbes Road
Milton, MA 02186
617 696 1320 fax: 617 696 1323 mrokun@aol.com
Lecturer, Tufts University School of Medicine
Senior author of textbook, Gross and Microscopic Pathology of the Skin
formerly:
Clinical Professor of Dermatology and Pathology, Boston University School of Medicine
Director, Boston Dermatopathology Laboratory
Chairman, Dermatopathology Foundation,
Principal Investigator, National Institutes of Health, Extramural Grant