Sandy Weill's Legacy

Citigroup Chairman Sanford I. "Sandy" Weill chose an opportune moment to turn over the job of chief executive officer to his top adviser, Charles O. "Chuck" Prince III. Weill's July 16 announcement came after more proof that he has continued to do what he has always done best: deliver strong financial results. On July 14, the world's largest financial company announced a 5% gain in second-quarter earnings as net revenue hit a record $19.4 billion. Citigroup stock is up 40% since its February low. Said Prince Alwaleed bin Talal, the company's largest shareholder: "I will hold their shares forever."

Again and again in his long career, the 70-year-old Weill has shown an uncanny ability to buy undervalued companies, strip away overhead, and mesh them with his growing financial machine. His conquests range from Primerica to Travelers, Citicorp, and Golden West Financial. Since 1986, the total return to shareholders of Citigroup and its predecessor companies run by Weill has been 22% a year, double that of the Standard & Poor's 500-stock index.

But if Weill is an investor hero, he's a flawed one. On his watch, Citigroup has run afoul of prosecutors and regulators. His star telecom analyst, Jack Grubman, quit last year amid charges that he pushed stocks he didn't believe in simply to help Citigroup land investment-banking business. Weill himself urged Grubman to "take another look" at AT&T (T ) shortly before a big underwriting decision. Weill was never charged with any wrongdoing. He did, however, sit on AT&T's board while its chairman served on Citigroup's. Though legal, such interlocking directorates are not exactly good corporate governance. This year, Citigroup agreed in April to pay $400 million to settle charges brought by New York Attorney General Eliot Spitzer -- the most money paid by any Wall Street firm. One highly unusual provision of the settlement forbids Weill to speak with his own securities analysts about the companies they cover.

Reformers argue that Citigroup's transgressions aren't isolated slipups -- instead, they're the inevitable outcome of a corporate structure in which synergy turns into conflicts of interest. There's an inherent conflict of interest between lending money to a company and selling its stock to investors. Likewise, there's a conflict between advising people what stocks to buy and earning fees as an underwriter of stocks. In theory, of course, these conflicts can be managed. But at Citigroup, they sometimes haven't been.

Weill is likely to remain chairman of Citigroup until the end of 2005. He has already made a good start at reform by bringing in the respected Sallie L. Krawcheck to run the brokerage business. He would be wise to continue using his stature to ensure that his legacy will be an institution that is not only financially successful, but ethically exemplary as well.

Corrections and Clarifications "Sandy Weill's legacy" (Editorials, July 28) incorrectly included Golden West Financial in a list of acquisitions by banker Sanford I. Weill.
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