Dodd-Frank requires a non-binding vote by a company's shareholders on whether they approve of the executive compensation plan disclosed in its proxy material, known as the "say on pay" provision. Citigroup's shareholders today rejected the executive compensation plan submitted by the company. While non-binding, the "say on pay" vote is considered to carry significant weight as a shareholder signal to management that the managers are acting outside of shareholder approval.Per the Wall Street Journal: "Shareholders of Citigroup Inc. on Tuesday handed the bank a scathing rebuke, rejecting a board-approved compensation package for its senior executives that boosted Chief Executive Vikram Pandit's 2011 pay to $14.9 million from $1 a year earlier.
The shareholder vote, mandated by the Dodd-Frank financial overhaul law, is nonbinding and won't require Mr. Pandit or Citigroup's other executives to give back pay they have already received. But it is a rare setback for a large corporation and could force Citigroup to rethink aspects of its executive-pay practices. Corporate governance advisers had criticized Citigroup's plan because it failed to closely link pay to performance."
Citigroup's shareholders are the first of any major corporation to reject the executive compensation plan submitted for approval. The question is whether the board will take this non-binding vote seriously and begin to address concerns that pay is not significantly tied to performance at Citigroup. Early statements seem to indicate that management will consider this vote a serious rejection of business as usual.
Board chair Richard Parsons responded as follows: "The result 'is a serious matter,' Citigroup Chairman Richard Parsons said at the end of the company's annual meeting in Dallas, where the shareholder vote occurred. The directors will consult with shareholder groups to determine their concerns, he said. . . . The setback followed negative recommendations by two proxy-voting firms widely followed by institutional investors, and could foreshadow increasing shareholder activism. The California Public Employees' Retirement System, a major shareholder, voted against Citigroup's executive-pay practices because 'the bank has not anchored rewards to performance,' spokesman Brad Pacheco said."
Is more shareholder activism in the executive compensation arena on the horizon? The New York Times (DealBook) seems to think so. "The shareholder vote, which comes amid a rising national debate over income inequality, suggests that anger over pay for chief executives has spread from Occupy Wall Street to wealthy institutional investors like pension fund and mutual fund managers. About 55 percent of the shareholders voting were against the plan, which laid out compensation for the bank’s five top executives, including Mr. Pandit. 'C.E.O.’s deserve good pay but there’s good pay and there’s obscene pay,' said Brian Wenzinger, a principal at Aronson Johnson Ortiz, a Philadelphia money management company that voted against the pay package. Mr. Wenzinger’s firm owns more than 5 million shares of Citigroup."
If institutional investors become aggressive in combating the executive compensation problem in the United States, then we could see real change.
(photo courtesy of Aleš Gruden at sl.wikipedia)
I agree that institutional investors hold real power in situations like these. These institutional investors are already organized and can affect change by maintaining a unified voice and potentially selling their shares en masse. There is a growing realization that the "market" is not guiding exorbitant executive pay. The institutional investors, like the California Public Employees' Retirement System, are making the case that executive pay should not be so high when the purchasing power of average Americans (California Pub Employees) has remained stagnant. As Robert Reich noted today, "Institutional investors are catching on to a truth they should have understood years ago: When executive pay goes through the roof, there’s less money left for everyone else who owns shares of the company."
ReplyDeleteIt is a refreshing thought that shareholders, though through investment firms, are taking part in the process. The idea of obscene levels of pay has grown from lack of interest from shareholders. After what has happened particularly with these business,financial industries the shareholders have to pay attention and hold people accountable. The pay for performance is an idea, however, to get some new ideas there are other way to attract new leaders to these business.
ReplyDeleteIt is about time for this. Citigroup has the one of the greatest disparities between CEO salary and overall profitablility of the firm. For investors, this matters. It seems odd that shareholders have allowed this for years without an uprising.
ReplyDeleteBetween 2009 and 2010 (the economic meltdown), Pandit worked for a dollar of year. My response: big deal. When you've been banking double digit millions for years, you should be able to stay afloat for two years. More importantly, there's a greater chance than not, that his hand helped to guide Citigroup to the brink. To me, his reduction is salary was a necessity.
Additionally, that pay cut should be examined through the lens of the following information from a recent NY Times post. "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."
Sounds to me like Citigroup should have seen this confrontation coming.
"The California Public Employees' Retirement System, a major shareholder, voted against Citigroup's executive-pay practices because 'the bank has not anchored rewards to performance,' spokesman Brad Pacheco said."
ReplyDeleteThis is rich coming from a spokesman for one of the most corrupt and poorly run public employee retirement funds in the country:
CalPERS investment staff receive luxury travel, gifts from financial firms, LA Times
Critics say CalPERS’ pronouncements on corporate governance carried more weight before the pension fund’s own in-house corruption scandal and its alleged unfunded pension liability became public.
CalPERS has “so many governance challenges and conflict of interest problems,” said Stanford University Professor Joe Nation, who supervised a 2010 study that pegged the state’s unfunded public pension liability at half a trillion dollars.
“The question we need to ask is: Should CalPERS be as concerned about these governance problems elsewhere, or the social interest issues they take on?" Nation said in a phone interview. Perhaps, he said, CalPERS' focus should be on "earning the rate of return they need to fully fund their system.” -- California Watch
Federal regulators are investigating whether California violated securities laws and failed to provide adequate disclosure about its giant public pension fund, according to a person with knowledge of the investigation.
The fund, the California Public Employees’ Retirement System, known as Calpers, lost about a quarter of its total investment portfolio during the financial crisis, leaving the state responsible for replacing billions of dollars each year and contributing to its huge deficit. The question is whether California adequately disclosed in the preceding years how risky the pension investments were and how much money it might need to cover any shortfall.
It would be a blow to Calpers, which has used its institutional clout for years to promote good corporate governance and truth in accounting. Calpers has recently pushed for boardroom reforms at JPMorgan Chase, Goldman Sachs, Apple, and BP, among others. And it has sued Moody’s, Fitch and Standard & Poor’s, accusing them of giving “untrue, inaccurate and unjustifiably high” ratings to structured investment vehicles that failed in the mortgage collapse.
Its activism has served as a role model for smaller public pension funds that have also had losses, but might not have been able to challenge corporate governance practices on their own. But now the tables have turned, because S.E.C. investigators hope to use Calpers as an example in a case about of how misleading pension disclosures can amount to securities fraud, according to the person with knowledge of the investigation. -- The New York Times
Calpers is run by a cabal of former union officials who have been investigated for taking bribes from investment firms running into the tens of millions of dollars. It is the vehicle by which the public employees unions run a "heads I win, tails you lose" pension scam on the people of California.
Calpers made high risk investments, without disclosing what it was doing, losing hundreds of millions of dollars which the taxpayers must now replace. Wouldn't we all like to have the assurance that no matter how bad our investment decisions the government/taxpayers would be required to bail us out?
Before Calpers starts commenting on the sliver in Citigroups eye, they may want to examine the log in their own.
"The shareholder vote, which comes amid a rising national debate over income inequality, suggests that anger over pay for chief executives has spread from Occupy Wall Street to wealthy institutional investors like pension fund and mutual fund managers.
ReplyDeleteNo reforms have spread from the faux populism of the Occupy Wall Street movement. OWS is nothing more than the creature of the unions and their leftist allies in the academy who routinely exploit young people with little real life experience.
Eventually, most of these young people will realize that they are being set up to pay the massive bill created to fund the lefts aspiration to power.
The Wall Street Journal represented this event as "a rare setback for a large corporation." If you had to read that comment more than once, well so did I. I do not think this is a "rare set back" at all. I see it as shareholders finally saying enough is enough. It is very nice to see activism at this scale among shareholders. However, is it a little too late? Is the opposition to the compensation plan only being noticed because of Citigroups recent history? Probaly so, but whatever the reason more shareholders need to take note and start holding more executives accountable.
ReplyDeleteI have no problem with high compensation for corporate executives, even if that compensation happens to run in the millions. However, I do have a problem when compensation is not adequately linked to performance. Many of Citigroup's shareholders seem to share my sentiment. I can't help but wonder whether Citigroup's executive compensation package would have been passed before the Occupy movement shined a bright light on executive compensation. Either way, Citigroup's shareholders are demanding accountability, and that is a good thing. - Aaron Matthes
ReplyDeleteI think this is an interesting example of how many parts of our political system interplay to create a democratic shift in the way businesses operate in America. Here, there was consumer-protection/financial legislation passed in response to the abuses that led to our recent financial meltdown. The legislation merely requires a non-binding vote on an issue that otherwise would likely have been excluded from shareholder vote by securities regulations. As Aaron observes, the Occupy protests have created a climate where people have a renewed/newfound interest in corporate governance which may be a part of the overwhelming opposition to this particular executive pay.
ReplyDeleteI agree with the comments that are saying it's refreshing that shareholders and standing up and making a real stand, making their voices heard. It what some of us were talking about with respect to shareholder and public demand creating diversity on boards, here too, shareholder demand is having an effect on change -- this time on executive compensation.
ReplyDeleteAnd in addition to, as the blog post states, forcing Citigroup to rethink aspects of its executive-pay practices, this shareholder uprising could affect other large companies similar to Citigroup to rethink aspects of THEIR executive-pay practices. Other shareholders of other companies may see how Citigroup shareholders are making a voice for themselves and say, "We can do that too". I just read an article yesterday in the Pittsburgh Post-Gazette (http://www.post-gazette.com/stories/business/news/angry-shareholders-force-short-adjournment-at-eqt-annual-meeting-631924/) about shareholders of a natural gas company getting mad and demanding answers at the annual meeting. The meeting actually had to be stopped! Shareholders were also angered about executive compensation, and even questioned the directors on issues like fairness and how they felt about the Buffett Rule.
These events are a sign that shareholders WILL organize and get vocal when it involves issues they care about. Maybe we will see more of this: more companies having shareholders that voice their opinions, and more types of issues being voiced.
I have to agree with Mr. Mathes that high dollar salaries by corporate execcutives might be palatable if those salaries are linked to corporate performance. But, how do million dollar salaries and golden parachutes foster profit maximization and benefit to shareholders? Especially when companies are failing to thrive? Shouldn't corporate executives share in the losses of the company?
ReplyDeleteMoreover, I'm sure that when Dood-Frank was being debated before its enactment that many people felt that requiring a nonbinding vote of shareholders would do little to curb exorbitant executive pay. However, the simple fact the vote takes place,and brings publicity to the issue, likely puts pressure on executives to shrink the compensation amount before they put it to a vote. Though the vote is non binding it does not mean that it necessarily does not have teeth, as evidencced by the shareholders of citi group. -Jake Layne
Citigroup shareholders rejection of their executive pay plan stands in line with the values we’ve seen expressed through other outlets, particularly the Occupy Wall Street movement. Many shareholders agree that executive boards are entitled to appropriate compensation packages, but the figures attached to some executive directors border on the obscene. It’s all too often that executive seek increases in pay, as many proxy materials indicate. In the past, shareholders may have been less organized to combat such increased. However, the voting requirement established by Dodd-Frank seems to have gone a long way in coordinating shareholders efforts. Although the cote is non-binding, many boards seem to be listening. While there is still work to be done, this is a step in the right direction for shareholders everywhere.
ReplyDelete-RB
I agree it's a good sign that the shareholders rejected the compensation plan in their nonbinding vote. The Dodd-Frank Act is intended to curb the unhealthy practices that led to the financial crises of 2008, and since Citigroup is the first major corporation to use this tool, it sets great precedent to other shareholders that they can use this provision of Dodd-Frank to send a message to the board when they think executive compensation is rising to an excessive level again. Like the article says, pay must be genuinely linked to performance, and it also must be sustainable in the long run. It was the excessive risk taking on short term profits by executives that led to the financial crises, and that type of risk taking must be curbed today so as not to make the mistakes of the past. By voting against the compensation plan, shareholders show that they will not reward for that kind of risky spending with enormous pay packages.
ReplyDeleteI also agree with Ms. Harper, that Mr. Pandit's compensation of $1 during the year of 2009-2010 is a poor defense for this new compensation plan. Obviously he is able to sustain himself and his lifestyle from past executive payments. While he came on board at Citigroup at a time when he had to deal with the mess others made of the company, it still doesn't change the fact that the compensation package of any executive must be kept in check, and legitimately linked to performance. With institutional investors becoming vocal in the Citgroup situation, there is a real chance that the Dodd-Frank Act will make an actual difference in evaluating and curbing executive compensation.
Caitlin Bailey