GMI – “Citigroup Rebuff Should Surprise Nobody”

The followingentry appeared as part of GovernanceMetrics International’s GMI Blog. GMI is the leading independent provider of global corporate governance and ESG ratings and research. Corporate stakeholders – including leading investors, insurers, auditors, regulators and others – use GovernanceMetrics services to identify and monitor risks related to non-financial measures covering key environmental, social, governance and accounting risk factors.

By Richard A. Bennett – President and CEO (GMI Ratings)

Reports from today's Citigroup meeting indicate that, led by public pension funds, investors rebuffed the company's board in their compensation decisions. In the non-binding vote, only 45% of shares apparently approved board's pay report. Chairman Dick Parsons called the rejection a serious matter and pledged to engage with shareholders. The company should not be surprised.

Investors are rightly concerned about last month's report from the Federal Reserve that Citigroup had failed the Fed's latest round of stress tests.

As a result, in a severe economic downturn, Citi may be forced to raise more capital or postpone their dividend plans. Additionally, a host of investigations and settlements have been hitting the news. For example, two months ago Citigroup was one of five U.S. banks that agreed to pay the government $25 billion to end an investigation into abusive foreclosure practices.

As we noted a month ago,[E]ffective January 18, 2011, CEO Vikram Pandit's base salary was increased to $1.75 million, or 75% over the IRC tax deductibility limit. Additionally, the CEO received an aggregate mega-grant of 500,000 time-vesting stock options valued at more than $7.8 million in fiscal 2011. Equity awards should have performance-vesting features in order to assure full alignment with shareholder interests and market- priced stock options may provide rewards due to a rising market alone, regardless of individual performance.

And in the face of all this, Mr. Pandit received a bonus of over $5 million, making his total pay in 2011 nearly $15 million. Share price has declined over 20% in the past year.

GMI Ratings has characterized Citigroup's accounting as very aggressive for 11 of the past 12 quarters, and gives it an ESG rating of F.

(April 17, 2012)

The Board Director Training Institute (BDTI) is a "public interest" nonprofit in Japan dedicated to training about directorship, corporate governance, and related management techniques. It is certified by the Japanese government to conduct these activities as a regulated nonprofit. Read a summary about BDTI here, and see a menu of its services for both corporations and investors here.

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