Corporate Governance

Executive Compensation, Sandy Weill, and Subservient Boards

By J. Robert Brown

Citigroup has always been an interesting story.  In Opening Japan's Financial Markets, a book I published back in 1994, I wrote a chapter on Citigroup's (ne Citibank) unique efforts to crack the otherwise very closed world of Japanese banking.  It has a rich history and while there have been many mistakes, it has also had a history of innovation.

Citigroup has fallen on hard times.  Over the weekend, The New York Times published a story about Sandy Weill, the architect of Citigroup.  The story has a number of themes, including Weill's "responsibility" for current crisis at the Bank (''One of the major mistakes that I made was my recommending Chuck Prince,' he says of his handpicked successor, who ran the company from 2003 to 2007."), and his irrelevancy to any solution (when approaching the Citigroup board in 2007 to become involved, "No one responded to his offers."). 

We don't have an opinion on Weill's leadership although he did grow Citibank into the world's largest financial institution.  Likewise, whatever his mistakes, the article points out that he has taken a considerable portion of his wealth and donated it to assorted charitable causes, not something that everyone with a comparable net worth can say.

Mostly, though, we found insightful some of Weill's approach to compensation.  The piece noted that, after retiring, Weill was "horrified" at having been "cast as a greedy, out-of-touch Wall Streeter taking advantage of taxpayers"  The basis?  

• One news item, in particular, was crushing: Last winter, The New York Post ran a picture of Mr. Weill on its front page with the headline, 'Pigs Fly: Citi Jets Ex-C.E.O. to Cabo.' He had taken the corporate plane to vacation in Mexico, weeks after Citi had accepted a $45 billion taxpayer bailout. The flight provoked a public outcry and media frenzy.

Weill responded honorably by issuing a press release and promising "to never again use the Citi jet."  He likewise terminated his consulting contract in which he got the "jet, as well as office space, cars and security."

But the fact that he had the benefits at all was the more interesting note and reminiscent of a time when imperial CEOs could receive from subservient boards compensation packages that continued the corporate largess even into retirement and even though the retiring CEOs had the net worth and income to pay any such expenses directly.   

It was the era of Jack Welch at GE, who received post-retirement benefits that included, among other things, court side tickets and unlimited use of the corporate jet.  Both Welch and Weiss became rich heading their respective companies.  Yet despite the wealth, they accepted post-retirement packages that provided them with services and assets that their great wealth could easily afford. Somehow using corporate assets provided greater satisfaction than using their own.

With public attention, both CEOs ultimately decided to give back or reduce significantly these post-retirement benefits.  But for every CEO that acted this way, there were no doubt plenty of others that merrily continued to use the corporate jet and take advantage of other similar benefits.  In other words, morality and principled behavior is not an adequate check on this type of largess.  It instead takes an active, strong board of directors.  Unfortunately this was not typically the case then and is not typically the case today.

The types of benefits given to Weiss-Welch are probably not as common today. More rigorous disclosure requirements have made it harder to keep these types of post-retirement packages out of the public eye.  Yet the problem of subservient boards that pay excessive compensation remains unchanged.  It remains the great unfixed problem of the current financial crisis and, from all indications, will remain unfixed once the crisis ends. 

Full post as published by The Race to the Bottom on January 07, 2010 (boomark / email).