Dec. 29 (Bloomberg) -- It was Friday, Nov. 21, and Citigroup Inc.’s shares had plunged 51 percent in four days. Vikram Pandit, chief executive officer of the American banking icon, with 350,000 employees and billions of dollars in souring assets, was on the phone with Federal Reserve and Treasury officials. Executives were huddled in the company’s New York headquarters on Park Avenue.

Sir Winfried Bischoff, Citigroup’s London-based chairman, was at the Penha Longa Hotel and Golf Resort in the hills outside of Lisbon, attending a conference on globalization. When it came time for Pandit to brief the board, Bischoff participated over the phone, and so did the majority of the company’s 14 directors.

As the credit crisis gripping the global economy stretches into a third year, corporate directors are facing a storm of scrutiny for the instances when they’ve failed to show up -- to sound the alarm as imprudent investments piled up at Citigroup or Bear Stearns Cos., for example, or to right the strategy at General Motors Corp. as the company was losing touch with car buyers’ tastes and burning through cash.

Improving the effectiveness of boards, and their accountability, may be more likely now than at any time since the collapse of Enron Corp. and WorldCom Inc. seven years ago, says Catherine Bromilow, who leads the U.S. corporate governance group at PricewaterhouseCoopers LLP.

“Shareholders have lost a lot of money,” Bromilow says. “A lot of things are now going to come to a head.”

Share Performance

How well a board oversees its executives -- their pay, their performance and the risks they’re taking -- may affect a company’s shares. Morningstar Inc. assigns governance letter grades for U.S. corporations by measuring such things as how well boards monitor executive pay. From Oct. 10, 2007, when the Standard & Poor’s 500 Index peaked, to Dec. 5, 2008, shares of companies that earned A’s fell an average of 33 percent, while the index fell 44 percent; those that got F’s tumbled 63 percent.

Boards need to make sure executives do what they promise, says Bill Smith, founder of New York money manager SAM Advisors LLC, which owns about 50,000 Citigroup shares. He points out that in 2006, Charles O. Prince, then Citigroup’s CEO, promoted Robert Druskin to chief operating officer with explicit directions to slash expenses. The next year, Citigroup added 48,000 people.

‘Where Was the Board?’

“Where was the board saying, ‘How are we doing on cost cutting?’” Smith asks.

Citigroup’s November crisis ended with the company becoming the biggest recipient of U.S. bailout funds. The government invested $20 billion, on top of a previous $25 billion, and guaranteed $306 billion of troubled assets.

Smith reacted by writing to Treasury Secretary Henry Paulson, urging him to fire Pandit and the board. As of mid- December, he hadn’t received a reply. Citigroup spokeswoman Shannon Bell declined to comment.

Board shortcomings are apparent at General Motors, too. The company’s share of the U.S. market eroded to about 22 percent in 2008 from 28 percent in 2000, when Rick Wagoner became CEO, according to Autodata Corp. GM’s losses since 2005 total $72.4 billion.

Through it all, GM’s directors -- including former Eastman Kodak Co. CEO George Fisher and Erskine Bowles, a former aide to President Bill Clinton -- never shook up management. The board even approved a 40 percent increase in Wagoner’s compensation in 2007, to $14.4 million.

‘Era of Low Standards’

Accounting frauds spurred the last round of governance changes in the U.S. On July 30, 2002, after the Enron and WorldCom scandals, President George W. Bush signed the Sarbanes-Oxley law. “The era of low standards and false profits is over,” he said.

The main goal was to force executives -- and directors - - to take responsibility for a company’s bookkeeping and auditing to prevent fraud. The law has been effective, Bromilow says. “You’d be hard-pressed to find directors now who aren’t taking their job seriously,” she says, because they don’t want to end up in court.

Nell Minow, who has been agitating for better corporate governance for two decades, says directors remain too friendly with their executives. Minow, who founded the Corporate Library, a research group in Portland, Maine, wants companies to make it easier to replace directors by giving shareholders a vote on every board member every year.

Staggered Terms

About 66 percent of S&P 500 companies have adopted these annual full-board elections, up from 40 percent five years ago, according to Spencer Stuart, an executive search firm. Many of the rest give directors staggered three-year terms, making it impossible to change a majority of the board all at once.

Gary Wilson, a former chairman and principal owner of Northwest Airlines Corp., says splitting the jobs of chairman and CEO might be the most important step toward better governance.

“If the CEO and chairman are the same, the power balance is totally out of whack,” says Wilson, a Yahoo! Inc. director.

Investor Smith agrees. “When the chairman is the CEO, it’s his board,” he says. Still, the separation of the two jobs at Citigroup -- done a year ago, after Prince was fired -- hasn’t been sufficient because Bischoff is also an insider, Smith says. “In the case of Citi, you have a figurehead acting as chairman,” he says. Bischoff is a former CEO and chairman of Schroders Plc.

‘Disconnected From Risk’

Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware, says board members need to be independent of management and have expertise in a company’s business to help spot risky strategies. “Boards seem to have been disconnected from the risk and enamored with the leaders,” he says.

One thing the financial crisis has demonstrated, Elson says, is that shareholders need to take responsibility and vote. “A citizen of a democracy has an obligation to participate, no matter how many shares he has,” he says.

To contact the reporter on this story: Lisa Kassenaar in New York at lkassenaar@bloomberg.net.

Last Updated: December 29, 2008 00:01 EST