Citigroup Re-Arranges Deck Chairs; Market Applauds(?)

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Includes: BAC, C, XLF
by: Sean Park

Obviously, Citigroup (NYSE:C) has continued to be much in the news of late, first becoming a penny stock and then enjoying a nice bounce this past week because, well…(short covering?) For better or worse, I try to focus mainly on the tremendous opportunities that exist in the context of inventing the future of such a vital yet stale industry that is finance. So why, I asked myself, so many posts about Citi?

I guess it is impossible to write a blog like mine without posting relatively frequently about Citigroup; every hero need a nemesis right? So I guess in this context they’re the Joker (and I’m, um…Batman?)

Anyhow, amongst the noise surrounding Citigroup this week, I think Roger nails the heart of the matter:

Clearly much of the price appreciation is due to a vicious short-covering rally that Messrs. Pandit and Lewis kicked off. But the fact is, what do they have to lose? If they can fool us long enough, credit spreads will come in and recovery will become a self-fulfilling prophecy. Otherwise, Congress (read: the US taxpayer) will bail them out once again. Citi, B of A and AIG have each had multiple bites of the bailout apple, so what’s another bite among friends? They are inclined to do this because their reputations are already severly damaged; in essence, short of outright fraud, they can’t get any worse. Therefore, they are motivated to throw caution to the wind, be super-positive and hope for the best. If new management with fresh reputations were on the scene, the would be much less inclined to release bullish statements without empirical data to back it up. This is a major flaw of TARP: letting incumbent managements stay around. It has created perverse motives that serve neither the troubled institutions nor its shareholders very well.

So with this in mind, I’ve been curious to see how the whole (non-executive) Boardroom shake-up that has been hinted at would play out. Well on Friday Reuters reported that Citi would be adding (at least) three new outside directors, and confirming that - due to mandatory retirement at age 72 (not gross negligence and/or insanity) - 2 current directors would be leaving. Speculation was that the new directors would be:

Wow. That will really shake things up. I mean these new guys, they bring a completely new perspective to the existing Board, right? A real diversity of experience and knowledge. Two plus two equals five stuff…

I don’t know much/anything about Messrs. Grundhofer, O’Neill or Thompson, but I’m pretty sure they are all very talented, experienced managers with great track records; and there is no reason to believe they won’t be an improvement on whomever they replace (admittedly a fairly low hurdle…) But c’mon! Where are the new Board members who will challenge the industry (not just the corporate) status quo? Who have a vision of what finance might/should be in the 21st century? Where is the new Board member with a firm grasp of the latest trends (and implications thereof) in information and communications technology and how they will shift the societal and cultural framework in which Citi operates over the coming years? Where is the independent Director who isn’t a paid-up member of the Fortune 500 great-and-good (and so will be more likely to bring a different perspective to the table, and less baggage)? Where are the Board members that manage their own email inbox (or at least read and respond directly themselves), that have a Facebook or a Twitter account, that write and/or read blogs? That have bought at least one iPhone app and feel more panic when they don’t have access to broadband/the web than when they don’t have a mobile/voice signal?

Every successful team I’ve ever seen or been a part of has one common denominator: diversity. Diversity of experience. Culture. Expertise. Seniority. Temperament. Gender. And even better if there were one or more ‘independent thinkers’ amongst the group. And just to be clear, I’m not talking about box-ticking compliance driven ‘diversity’ (although by accident rather than by design, this can sometimes help at the margins, by at least avoiding the ten 60-something white guys out of central casting…) but diversity that creates intersections. Of ideas, world views and aspirations. Because that’s where interesting things happen. (You can bet that my bank’s Board will have this principal as its foundation.)

I’d be curious to know which headhunter(s) worked/are working on this mandate and what was their brief (and who wrote it?) I would have hoped (on behalf of US taxpayers) that the Obama administration had much input into the search criteria and that they would be looking for Directors that would focus primarily on ensuring the future success of Citigroup without regard to worrying about legacies and sunk costs (real and psychological.)

As an aside, take a couple minutes and wade through the mangroves of Citi’s corporate governance. No wonder it’s gone so horribly wrong! (I wish I had looked at this a couple of years ago, even without hindsight, it just screams sell…) They have 49 people on their Senior Leadership Committee. FORTY-NINE!!! I assume they at least have a Wiki to manage committee business…