Finance

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

Wall Street's top executives should be pressed for substantive answers to harder-hitting questions about long-term performance. 

That's a notion being trumpeted by well-known bank analyst Mike Mayo, who has never been one to shy away from criticizing the companies he covers. And boy, does he have a point.

On Wednesday, Mayo published some questions he plans to ask Citigroup Inc.'s Chairman Michael O'Neill and CEO Michael Corbat at its annual general meeting later this month.  They haven't truly been held accountable for the lender's mediocre returns, which includes its inability to meet a targeted return on tangible common equity of 10 percent by 2015, a goal that has since been pushed to 2019. Mayo's solutions include another round of restructuring, or, as we at Gadfly discussed here, if something is structurally wrong, perhaps the bank should break up.

Worst in Class
Citigroup executives deserve closer scrutiny than rival U.S. banks based purely on the lender's visibly weaker performance
Source: Bloomberg

Another valid question is why Citi feels the need measure its financial and share price performance against European lenders Barclays Plc, Deutsche Bank AG and HSBC Holdings Plc? (The question is somewhat rhetorical: It's so the bank doesn't place dead last, which it would on most metrics if compared with U.S. rivals). 

Laggard
Citigroup's continued underperformance has left its valuation trailing major U.S. rivals and is partly why the breakup argument is consistently revisited
Source: Bloomberg

And oddly enough, it removes its weaker European counterparts for compensation comparison purposes. The same can't be said for Bank of America, which in addition to reviewing its closest five U.S. competitors, evaluates the performance at worse-off European banks such as Credit Suisse Group AG and Royal Bank of Scotland as well as similarly-sized U.S.-based companies such as Coca-Cola Co. and General Electric Co. This seems unnecessary and almost like an easy way to justify Chairman and CEO Brian Moynihan's potentially outsized $20 million in annual pay. As I've written, Moynihan continues to receive performance-based stock grants with targets that need raising in light of rising rates and a brightening outlook. (Unfortunately for investors, they weren't, according to BofA's latest proxy). 

Deserved?
CEO compensation at large banks doesn't necessarily reflect lender performance
Source: Institutional Shareholder Services
*Based on more recently published proxy

Shareholders should feel emboldened to voice their concerns at coming annual meetings in the hope of obtaining meaningful changes. Those from one bank have already missed their shot. In a separate panel hosted by ISS Analytics, Mayo mentioned Bank of New York Mellon Corp.'s annual general meeting on Tuesday as an example, where he said not one question was asked about the custody bank's business mix or strategy. Rather, investors lobbed soft, yawn-inducing questions about diversity, climate change and corporate responsibility.  

Sure, some investors may prefer to keep their dialogue with management behind closed doors -- after all, most don't want to be labeled as activists, and it's not in their investment mandate to publicly berate a company for missteps. But Mayo's right: If they speak up only behind closed doors and executives makes promises, how can they be held accountable?

Got Your Back?
Despite mixed performance, investors have broadly been supportive of U.S. bank CEOs, with a median cumulative vote of 97.9 percent
Source: ISS Analytics

Citi reports its first-quarter earnings on Thursday, when Corbat and CFO John Gerspach are expected to shed light on the bank's views about the usual hot topics such as potential deregulation and tax reform, capital returns and its Mexico business. And although the lender's shares have risen roughly 18 percent since November's U.S. election, they've given up some ground this year. It's management's turn to convince investors that rate increases aside, the bank's on track for better days. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Mayo has been flying solo since CLSA closed its U.S. equity-research arm in February. He's developed a reputation for outspokenness that's in stark contrast to analysts across the globe who tend to go a little soft on management teams, from whom their investment banking arms canvass for fees. 

To contact the author of this story:
Gillian Tan in New York at gtan129@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net