Board of Directors | The Finlay Centre for Corporate & Public Governance

Outrage of the Week: The Madness that is Becoming Citigroup…

To say that one of the most storied banking names in the world has become a ward of the state is to diminish the extent of the reliance. Citigroup has taken on the likeness of a crippled orphan in a Dickens classic, unable to stand on its own and unlikely to survive against the bitter winds of Darwinian, or in this case, free market, vicissitudes.

There is a scene in the movie Nicholas and Alexandra where, in the days leading to the outbreak of the First World War, the Czar finally orders a general mobilization of the Russian troops. Among his war council, only a single advisor -played masterfully by Laurence Olivier- voices dissent. Sensing the catastrophe that will soon befall his country, and the fate of the Romanov dynasty, he calls the decision “madness.”

It is a sentiment that quickly springs to mind over the latest tortured survival plan involving Citigroup and the American taxpayer, which, after pumping $45 billion into the institution, now becomes the largest single shareholder. Expectations are that still billions more will be required. To say that one of the most storied banking names in the world has become a ward of the state is to diminish the extent of the reliance. Citigroup has taken on the likeness of a crippled orphan in a Dickens classic, unable to stand on its own and unlikely to survive against the bitter winds of Darwinian, or in this case, free market, vicissitudes.

We have offered our comments and predictions about the unraveling of this institution, and the shortcomings of its board, for a number of months. It began with the overblown, ego-driven monstrosity created by Sandy Weill, who capped his career with a series of costly scandals. It continued with his hand-picked protégé, Charles Prince, who, after boasting that he had his arms around the challenges to the company, displayed a striking lack of judgment and experience in handling those twin vials of financial mercury known as risk and leverage. It then turned to a hedge fund manager, Vikram Pandit, for the bank’s salvation, which was more like the Titanic turning to the iceberg. Sound governance has been the missing voice in the room at every step along the way.

“Too big to fail”? Sandy Weill, Charles Prince and Robert Rubin invented the concept long before the current crisis made government the hesitant partner. There has never been a sense of mortality in the modern incarnation of this company. Personal hubris, the illusion of invincibility that comes when reality is viewed by distance, and a belief in the inevitability of never-ending success have been the chief prerequisites for entry into the executive suite. Accountability never even made its way into the elevator, much less into the boardroom, at Citigroup.

It may well be that weaknesses and failures in government oversight, especially in the previous administration that favored less regulation and soon became fixated on blunting the effects of Sarbanes-Oxley shortly after it was passed (as former Treasury Secretary Paulson betrayed in his first year on the job), played a role in bringing Citi to this sorry state. So, too, did the long vacation from reality that Wall Street and much of business took when they saw an endless horizon of people willing to pay any number of transaction fees, max out their credit cards and refinance their homes multiple times, and a banking system eager to make ever grander sacrifices to the god of high leverage. Citi pursued this path with unbridled enthusiasm.

What needs to be remembered is that Citigroup’s directors are the ones who were in the room -or were supposed to be- when the key decisions were being made and the big questions needed to be asked. They failed on both counts. As the New York Post quoted us on the subject some weeks ago,

Citigroup’s board of directors increasingly resembles a first-class sleeping car on a train wreck that just keeps happening,” said J. Richard Finlay, head of the Centre for Corporate & Public Governance.

“Almost whatever it does, it is too slow and too late.

It can take months for Citigroup’s directors to clue into what others in the real world have known for some time”.

Public rescues and bailouts, including the most recent effort with Citigroup to twist itself into a pretzel by turning the government’s previous cash injections into the largest ownership stake in the bank, only give tacit approval to the governance disasters and shortcomings that have taken place. It is a bad model for the financial world in the best of times. But the worst financial crisis since the Great Depression makes this far from the best of times.

We remain skeptical, as we have from the outset of the TARP bailout, that the infusions of public investment are either wise or that they will work as intended. One of the reasons is that essentially the same players remain in the boardroom in most situations. This is especially true at Citigroup. A measure such as the unprecedented and costly type announced today should have been accompanied by an announcement of immediate changes in the boardroom and in the CEO spot. That it should be left to long-time director and current board chairman, Richard D. Parsons, to say that there is no time frame for making any changes at the top shows that he, the board and the administration still do not get it.

Much more than Citigroup’s stock has plunged 94 percent over the past year. Respect for capitalism, and the timeless covenant that the use of other people’s money must be accompanied by the most rigorous accountability at all levels, have been casualties on a grand scale.

The failures that have led to today’s most recent rescue, much of which can be traced to arrogance and lack of accountability at the top, are the doubtless outrage here. But when a government continues to buy into the notion that such institutions are too big to fail, by throwing billions after upon billions into propping up such a discredited model even after bailout after bailout fails, it is beyond folly. One cannot repeat the same actions in response to the same mistakes, which produce the same outcomes time and again, as now two separate administrations have done with their banking and insurance rescue plans, without the specter of madness being raised. The madness can be counted in the trillions now. More will surely follow with the horrific $60 billion forth-quarter loss anticipated for AIG, another showcase model of discredited corporate governance and risk management. With three bailouts totaling $150 million, the company has become a significant drain on the U.S. taxpayer – now the insurance giant’s largest single investor. What toll this and all the other apparently bottomless handouts and bailouts of former bastions of free market principles who, not long ago, wanted to be left alone by government, will take on other virtues, such as the credibility of a young administration and the confidence of an exhausted and battered American public in it business leadership, is yet to be written.

We can hope that the fate of the financial system and the trust that is indispensible to the institutions of both capitalism and government do not suffer anything like the fate of that other institution where indifference to the rising dissatisfaction of constituents had a very bad ending. It, too, proceeded on the mistaken belief that it was too great to fail and that the world could not possibly survive without it, until its financial excesses and arrogant missteps mounted so high that they toppled over even the gilded gates of the unthinkable and the unprecedented.

RIM’s $77 Million Black Eye

We said a while back that there would be more surprises coming out of Research In Motion’s options backdating scandal. A big one came today.

Two years ago, I raised a number of concerns about Research In Motion’s corporate governance, describing it as a relic of the past. As its backdating scandal unfolded, I expressed serious reservations about RIM’s board practices, the role of its directors in the backdating review, and, ultimately, the outcome of that internal investigation. Simply put, there was something terribly fishy in the Waterloo-based boardroom, and in the flimsy excuses offered up by RIM’s founders and co-CEOs Jim Balsillie and Mike Lazaridis. As I noted in 2006:

In my view, these most recent developments at RIM are part of a larger problem involving its corporate governance practices, the structure of its board, the practice of awarding stock options to directors, the over-presence of management on a small board, the lack of an independent director as chair or even a lead director, among other concerns.

I said in an earlier posting that we have not seen the last of surprises at RIM over its stock options probe. This is one to add to the list. There will be more to follow.

A big one came today, when the company settled with the Ontario Securities Commission over allegations related to improper options backdating. A number of officers and directors will pay $77 million in fines and penalties. It is a record settlement for the OSC.

We will be taking a further look at the settlement and the failures that led to it in the days ahead. Here’s a clue as to what’s at the center of it. It comes in the words of OSC vice chair James Turner, who cited a “fundamental failure” in RIM’s corporate governance, which gave rise to the improper backdating and a host of misleading and inaccurate company disclosures. Sound corporate governance was definitely absent at RIM. But this costly outcome is also a lesson in the importance of ethics, transparency and integrity -three values that were more than occasionally missing in RIM’s boardroom.

Our previous postings on RIM are available here.

Reshuffling the Crew on the Citigroup Titanic

True to form for a company that has proven itself consistently too late and too slow, Citi’s board is now moving backwards with the choice of its new chairman, Richard D. Parsons.

Mr. Parsons is part of the old guard and has been a director since 1996. He is among the crew that missed more red flags than are on an admiral’s ship and has presided over the obliteration of billions in share value.

What Citi needs is new people and bold action to steer it into prosperity. That begins with Citigroup’s directors. Rearranging the crew on the Titanic after it hit the iceberg would not have done much to avoid the impending calamity. Citigroup and its board have repeatedly managed to hit one iceberg after another over the past several years. Reshuffling its current directors isn’t likely to have any better outcome.

The Health of Apple’s Board Also Raises Questions

Investors need to be concerned when directors seem more like a chorus of cheerleaders than a boardroom of independent guardians.

The eyes of investors, which, heretofore, have been focused almost entirely on Apple CEO Steve Jobs, are now turning to the company’s directors. It is a long overdue scrutiny. Two years ago, in the wake of Apple’s stock option backdating scandal, we expressed concerns about the structure of its board, which at the time was a seven-man operation.

Since raising the point -and we were the first to do so- Apple has added one woman to the board. But it remains a small and rather weak example of modern corporate governance practices. It met only five times in 2008, a period when many companies were facing the likelihood of recessionary consumer pressures. Official records do not even properly name the officer who chairs the board. We all know that was Steve, but why the problem formally disclosing that fact?

The board seems to have taken little notice of the need for succession planning, even though the company’s founder and CEO has a record of serious health problems. The reason seems obvious: Steve did not want that process to move forward. All its appearances and statements suggest that the culture of Apple’s board is one of unswerving deference to Steve Jobs. Look at its January 5^th press release concerning Steve’s first disclosure about his health and the wording seems more consistent with the actions of a chorus of cheerleaders than a boardroom of independent guardians. It’s pretty obvious that the board failed to do any due diligence before issuing this statement. Shareholders may well have been made more vulnerable to precisely the kind of sudden loss of value that happened yesterday as a result. (more…)

Nortel Unplugged

The company’s falling into bankruptcy proceedings is the ultimate progression of decades of flawed strategies, management hubris and a clubhouse full of disengaged directors.

With its Chapter 11 filing in a Delaware court today, Nortel is making its final journey as the company that once aspired to be a world-class technology player. It is unlikely to emerge as even a shadow of its current self, battered and weakened though it be.

This is the ultimate progression of decades of flawed strategies, management hubris and a clubhouse full of disengaged directors. This was a company which once boasted a market capitalization larger than all the Canadian banks combined. Today, start up t-shirt makers have a bigger cap. The stock once hovered above $125 a share in 2001 and 2002. Adjusted for its subsequent 10 to 1 consolidation, it closed at just under 4 cents (Canadian) on Tuesday. Trading was halted today.

We have commented about the failure of Nortel and the culture of boardroom arrogance that has now brought it to the steps of the Delaware bankruptcy court. We think of the arrogance of one-time CEO Paul Stern, the shuffling back and forth (with generous severance each time) in the CEO slot of John Monty from BCE -which created Nortel in the first place- and the huge misjudgments that saw the stock tank in the tech bubble, but still allowed then-CEO John Roth to make off with more than $150 million. We are reminded of the trophy directors who commanded amazing deference and respect in the business world but who seemed unable to figure out the most basic things of what was happening to the company under their noses. Then there is the string of accounting restatements and the alleged securities violations and criminal charges against previous management that shook shareholder confidence to its core and from which it has never returned. Most of all, we are thinking today about the tragedy of the human side at Nortel involving lost jobs and shattered careers in a company that had untold potential but in the end did not produce the boardroom leaders who could capture it or measure up to that trust.

More than a year ago, we proffered the thought:

With its history so steeped in scandal and its present still darkened by constant financial backpedaling, it needs to think through whether Nortel can go on being Nortel.

The company gave its answer today.

Two Faces of Governance at Citigroup

The board says it continues to stand behind current management, led by CEO Vikram Pandit. But can a board stand up while sleeping? This is a question investors must ponder.

If you are wondering how Citigroup could have lost tens of billions, seen the value of its stock pared by more than three-quarters, and required taxpayer guarantees and capital injections mounting into the hundreds of billions, look no further than two figures who have played a prominent role in defining the Bank’s corporate governance culture. (more…)

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