Some Opinions on the Citigroup Vote

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By Cydney Posner

Here's an interesting analysis in the New York Times Dealbook regarding the negative vote on Citigroup's say-on-pay proposal. There's been a lot of head scratching about the negative vote in light of the fact that the CEO had accepted only $1 in salary over the prior two years, the compensation appeared to be in line with other large banks and the stock price was up over the last year. See, e.g., http://www.theracetothebottom.org/home/citibank-and-say-on-pay-a-metaphysical-analysis.html  (attributing the result not to substance but rather to the bank's image problems) as noted in thecorporatecounsel.net blog.

However, the author of this Dealbook column notes that ISS had recommended against approval: "The influential proxy advisory service Institutional Shareholder Services had recommended that shareholders vote against Citigroup's executive compensation package because of the size and nature of the pay package for its chief executive, Vikram S. Pandit. Last year, the Citigroup board paid Mr. Pandit almost $15 million, plus one-time retention awards with a potential value of $34 million, as calculated by I.S.S. The proxy advisory firm recommended against Mr. Pandit's package because parts of his awarded pay were not based on Citigroup's financial performance, Citigroup stock had declined by more than 90 percent in the last five years and Mr. Pandit's pay package was not in alignment with that of his peers.

"Citigroup in part defended this pay package by arguing that Mr. Pandit had not received a meaningful salary for the three previous years, being paid only a dollar a year. This was nice of Mr. Pandit, but it must be put against the fact that Citigroup paid about $800 million to acquire Mr. Pandit's hedge fund, Old Lane, an investment that Citigroup subsequently wrote off completely. And Mr. Pandit received an $80 million payment from Citigroup last year as part of the Old Lane buyout. He's not about to become part of the 99 percent anytime soon."

The author opines that Citigroup should have bargained with ISS for an endorsement. Now, the author suggests, Citigroup will look like a "bad" actor and will face substantial public and shareholder pressure to respond, potential regulatory scrutiny and, given the size and prominence of the target, a significant risk of litigation for corporate waste or breach of fiduciary duty by the board. The author contends that, notwithstanding the business judgment rule, if a case were brought, the outcome would be uncertain: "Delaware has typically deferred to a board's judgment on compensation issues. However, executive compensation is such a hot potato these days that Delaware may decide to allow these suits in cases where boards are particularly heedless.

"At least one Delaware judge, Vice Chancellor Travis J. Laster, has hinted that the decision to ignore a negative vote would be subject to enhanced scrutiny or possibly a court rejecting the pay package as corporate waste. And Citigroup may be a particular target. It was only three years ago that a Delaware judge refused to dismiss a case alleging that the Citigroup board had engaged in corporate waste by entering into an agreement with Citigroup's former chief executive, Charles O. Prince, allowing him to receive $68 million upon his departure from the company in 2007. If nothing else, a Delaware court is likely to closely scrutinize Citigroup's conduct to make sure it acted appropriately here and with due care."

In speculating about what, if any, action the Citigroup board will take, the author rejects the suggestion that the board will ignore the vote result: "Given the risks and the hassles this no vote will now create, Citigroup is much more likely to try to do something rather than simply ignore the vote. At a minimum, its board will have to consider the possibility to ensure it is satisfying its duties.

"What will the board actually do? Mr. Pandit has already been awarded his 2011 pay, so unless the regulators force a retroactive pay cut, Mr. Pandit will have to agree to one. Going forward, the board will have more latitude, and this may be where it tries to show it is making cuts. But again, Mr. Pandit will have to play along. The real question is whether any prospective cuts will be enough without reducing Mr. Pandit's enormous 2011 pay package.

"The Citigroup case could thus become an important test of how companies' respond to negative say on pay votes. I'm particularly intrigued to find out what happens if Citigroup fails to adequately respond to all of the players who are now about to become involved."

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