write easy words, and make sure it is 500 words…<\/p>\n
In 2012, Citigroup\u2019s shareholders shocked the bank\u2019s managers by voting \u201cno\u201d on a pro-posed $ 15 million pay package for CEO Vikrim Pandit. In a so- called say- on- pay referendum, mandated by the new Dodd- Frank Act, a solid majority\u2014 55 percent\u2014 of shareholders withheld approval of the compensation package. Although the vote was not binding, it clearly signaled to Citigroup\u2019s board and CEO that shareholders were unhappy. \u201cHere we have the majority of shareholders indicating frustration with the overall level of compensation for executives,\u201d said a representative of the labor federation AFL- CIO. \u201cIf it can happen at Citigroup, it can happen anywhere.\u201d<\/p>\n
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 \u201cciti\u201d in blue lower- case type against a white background, with a red eyebrow connecting the two i\u2019s.<\/p>\n
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\u2014 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\u2019s 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.<\/p>\n
Under Section 951 of the Dodd- Frank Act\u2014 passed by lawmakers in response to the financial crisis\u2014 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 \u201cstarting point for dialog on excessive or poorly structured executive pay.\u201d 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.<\/p>\n
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.<\/p>\n
In its proxy statement, the board defended its proposal by noting that Pandit, who had taken over as CEO in late 2007, had \u201cled Citi\u2019s return to profitability and . . . positioned the company for future growth.\u201d It pointed out that the bank\u2019s 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\u2019s precarious state.<\/p>\n
But many shareholders\u2014 including several large institutional investors\u2014 disputed the board\u2019s logic. Two proxy advisory firms, Institutional Shareholders Services (ISS) and Glass, Lewis and Co., recommended that their clients vote \u201cno\u201d on Citi\u2019s 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 \u201cthe bank has not anchored rewards to performance.\u201d The bank\u2019s shares had declined more than 90 percent since 2006, and Citi had recently failed a \u201cstress test\u201d by the Federal Reserve to see if the bank had sufficient reserves to withstand a severe downturn. An analysis by Forbes ranked Citi\u2019s performance in the bottom three of 17 U. S. banks.<\/p>\n
After the vote, the bank\u2019s chairman called the shareholder rejection \u201ca serious matter\u201d and said the board would listen to the shareholders\u2019 concerns. The directors\u2019 options were limited, however. They could either ignore the vote or change the CEO\u2019s 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.<\/p>\n
\u201cIt\u2019s 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,\u201d declared a representative of CalPERS.<\/p>\n
Sources: \u201cCitigroup\u2019s CEO Rebuffed on Pay by Shareholders,\u201d The New York Times, April 17, 2012; \u201cCitigroup Has Few Options After Pay Vote,\u201d The New York Times, April 18, 2012; \u201cCiti Cleans Out Closet,\u201d The Wall Street Journal, October 4, 2011; \u201cCitigroup Investors Reject Pay Plan,\u201d The Wall Street Journal, April 17, 2012; \u201cCitigroup Shareholders\u2019 Vote on Exec Pay Sends a Message,\u201d Los Angeles Times, April 18, 2012; PBS NewsHour, \u201cCitigroup Shareholders Assert Say Over CEO\u2019s Pay,\u201d April 18, 2012, at www.pbs.org\/newshour;<\/a> \u201cEnhanced Investor Protection after the Financial Crisis,\u201d 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, \u201c2011 U. S. Postseason Report,\u201d September 29, 2011. Citigroup\u2019s website is at www.citigroup.com;<\/a> its proxy statements are available in the investor relations portion of the site.<\/p>\n Discussion Questions<\/p>\n 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?<\/p>\n 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?<\/p>\n 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?<\/p>\n 4. What do you think the board of directors should do now that a majority of shareholders have rejected the proposed pay package?<\/p>\n","protected":false},"excerpt":{"rendered":" write easy words, and make sure it is 500 words… In 2012, Citigroup\u2019s shareholders shocked the bank\u2019s managers by voting \u201cno\u201d on a pro-posed $ 15 million pay package for CEO Vikrim Pandit. In a so- called say- on- pay Read More …<\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-25631","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/posts\/25631","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/comments?post=25631"}],"version-history":[{"count":0,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/posts\/25631\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/media?parent=25631"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/categories?post=25631"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/tags?post=25631"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}