Citigroup Board Faces Challenges After Shareholder Say-on-Pay Vote

May 14, 2012 | Comments Off on Citigroup Board Faces Challenges After Shareholder Say-on-Pay Vote
Posted by John L. Sikora

As the media have reported recently, the shareholders of Citigroup rejected CEO Vikram Pandit’s $14.9 million compensation package at Citigroup’s 2012 annual meeting.  The vote was required as a result of the amendments to the federal securities laws implemented by the Dodd-Frank Act of 2010, which require public companies to hold advisory shareholder votes to approve or disapprove their executive pay at least once every three years.  However, this vote is advisory in nature, and the results of the vote are not binding upon Citigroup or its board of directors.

Citigroup’s board must now decide what to do in the wake of the shareholder vote.  Given that the vote is advisory, the board is not required to take any action.  However, inaction by the board will likely draw criticism, and the board may find itself faced with the task of defending such inaction to the shareholders at Citigroup’s next annual meeting.

Given the discontent expressed by Citigroup’s shareholders and the activist ripples evident at other large financial institutions (for example, Kenneth Lay’s ouster as Chairman of Bank of America in 2009), the board may decide to restructure/reduce Mr. Pandit’s compensation for 2011, as a significant portion consists of stock options that will vest over time.  However, if the board decides to restructure/reduce Mr. Pandit’s compensation, the board risks further marginalizing, and possibly alienating, Citigroup’s CEO.  The decision could create the appearance that Mr. Pandit does not have the confidence of Citigroup’s board, given that the board has the discretion to make no change despite the shareholders’ disapproval, if the board were inclined to do so.  In addition, the board would need to consider the ramifications of effectively rescinding a compensation package that was approved by Citigroup’s compensation committee and represents the product of the committee’s evaluations and judgments for the particular purpose of appropriately compensating and incentivizing the CEO.  This decision also presents legal and contractual issues.  For example, any stock option or restricted stock agreements or other contracts entered into between Citigroup and Mr. Pandit as part of the original compensation package would potentially need to be amended or terminated.  In anticipation of this scenario, a public company might consider including provisions in such agreements that permit the board to unilaterally modify the grant or award in the event that shareholders disapprove the company’s executive compensation in a say-on-pay vote.

Citigroup serves as the highest profile case so far of the impact of the say-on-pay vote on corporate governance.  Regardless of what the board decides, the strength of the board’s decision-making process and its priorities will surely be tested, and the board’s actions will likely be evaluated as to whether they reflect the board’s commitment to its fiduciary duty to the shareholders or the board’s allegiance to the CEO.

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