CalPERS vs. Weill, Round One

The pension fund couldn't boot him from Citi's board this time, but it vows to fight on. With performance strong, does it have a chance?

A Citigroup without Sandy Weill on the board? So far, despite heavy lobbying from some prominent shareholder activists, it's still unthinkable. At the annual shareholder meeting on Apr. 20, all the company's proposed nominees were elected with no less than 94% of votes. That includes Weill, who will retain the chairman's seat.

That's not the way the nation's most powerful public pension fund wants it. Arguing that Weill should be held accountable for his "significant role in several scandals to negatively impact the company" over the last two years, the California Public Employee's Retirement System (CalPERS) withheld its votes for about half Citigroup's (C ) lineup of directors, including Weill.

"We have one time a year when we can hold directors accountable," says Brad Pacheco, a CalPERS spokesman. "And we want to hold [Weill] accountable for the significant costs incurred by settling civil investigations of improper practices."


  In 2003, Citigroup agreed to pay $400 million as part of a $1.4 billion settlement with securities regulators over conflict-of-interest charges among its stock analysts. Weill himself was never charged, but he was shown to have used his powerful position to influence Citi telecom analyst Jack Grubman to up his rating of AT&T (T ) during the tech bubble's heyday.

Yet most of the other investors, at least on this issue, declined to support CalPERS, which has a long and well-known bent toward corporate-governance activism. One likely reason is the fact that Citi has performed so well. For first-quarter 2004, reported Apr. 15, net income climbed to a record $5.27 billion, a 29% increase over the same quarter a year ago. Quarterly revenues also climbed, to a record $21.5 billion, 16% higher than the same quarter in 2003.

The investors who voted to keep Weill and his colleagues on the board may agree with CalPERS in principle, but they find hard it to argue with Citi's success, reflected in the stock's performance. In the past year, share price has climbed from $38 to around $50 as of Apr. 20, about a 30% increase.


  Company performance, however, should not be the be-all and end-all in evaluating corporate governance, counters CalPERS. "These are the kinds of issues that, if not resolved, could lead to problems down the road," says Pacheco. "When a company is performing well, that's one of the better times to improve corporate governance. After everything unravels, it's too late."

In Weill's defense, Citi resolved issues of conflict of interest, paid its fine, and adopted reforms last year, argues spokeswoman Leah Johnson. In a written statement she says Citigroup, "acted swiftly and forcefully to adopt industry-leading reforms in this area." She adds, "Sandy Weill was at the forefront of these efforts." She calls CalPERS decision to withhold votes from certain directors "unwarranted."

Yet CalPERS plans to continue pushing for an independent director to serve as Citigroup's chairman. CalPERS is frustrated that Weill, who built Citi through a series of mergers in the 1990s into the country's largest financial institution, still has responsibility for broad strategic issues and major client relationships, even though he gave up the chief executive title (passing it on to his hand-picked successor Charles Prince) on Oct. 1, 2003.


  Some experts praise CalPERS for trying to hold the chairman accountable for obvious lapses in judgment. But others say it's a tough call to withhold a vote from someone like Weill and decline to take sides in the debate. "Weill is clearly an extraordinarily capable leader," says Gary Lutin, an investment banker and president of New York firm Lutin & Co, who says he can understand why investors would reelect him. "At the same time, some of his conduct, particularly in relation to the Grubman affair, has set a very bad example."

That's something CalPERS isn't likely to forget any time soon. Although the odds of Weill departing voluntarily are slim, experts say, for CalPers there's always next year. "This was a shot over the bow," says Melville Blake, CEO of Maywood Advisors, which does corporate consulting in the banking sector. "It serves as a warning. They view this as a battle, not the whole war."

By Amey Stone in New York

Edited by Beth Belton

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