It's been a strange week of shocks and surprises, as earnings season gets under way. One of the biggest shockers: Citigroup's (C 1.41%) Vikram Pandit abruptly leaving his post as CEO of the too-big-to-fail bank.
This opened the floodgates of conversation and controversy. However, it should be viewed as yet another sign that shareholders must continue to push for better corporate governance in America.
Pandit's painful goodbye
Just last week, I discussed signs that shareholder rights are making progress, even if some chief executive officers aren't particularly thrilled by the embarrassment of high-profile shareholder criticism.
At companies like Aviva (AVVIY 0.74%) and AstraZenca (AZN 0.28%), chief executives walked pretty immediately after shareholder censure of compensation packages, providing poster children for the 2012 "shareholder spring."
Citigroup, of course, clocked the highest profile defeat of an American company's CEO pay package this year. Pandit didn't take his ball and go home right away, but it's easy to make a connection between shareholder pay concerns at the company and his recent departure.
Vikram Pandit accepted a $1 salary at the beginning of his tenure at the bailed-out financial giant, but this consolation prize was merely a symbolic gesture of making things up to American taxpayers -- of course, Pandit didn't really take home a mere couple bucks over the years since his hire.
Conjecture that maybe Pandit felt overworked and underpaid are especially insulting when you consider the ones who have really suffered: Citigroup shareholders. They voted against his newly minted $15 million compensation package earlier this year. (He received it regardless; these votes are non-binding.)
However, Pandit's total compensation, tied to stock options and other pay that may or may not vest, has been calculated at between $11.9 million and $56.4 million. Although that's considered "low" in Wall Street's crazy compensation geography, as my colleague Alex Dumortier recently noted, there are other ways Pandit has capitalized off of Citigroup.
Citigroup's $800 million purchase of Pandit's hedge fund, Old Lane, in 2007, netted Pandit $165 million. Old Lane was shut down less than a year later. Although Pandit was required to invest $100 million in the fund, he still ended up walking away with $80 million when all was said and done.
Compare Pandit's winnings to the plight of Citigroup shareholders; their shares have lost most of their value during Pandit's time at the helm. This makes it particularly galling when you consider that most of Pandit's Citigroup-related realized windfall actually had absolutely nothing to do with his own success or failure as a chief executive officer of the firm.
Thankfully, Pandit isn't expected to receive a rich severance package, but there's no reason to shed tears for the departing chief executive's financial standing.
The high cost of hubris
On the big-picture level, it's a good time to revisit the idea that the financial crisis had poor corporate governance at its core. As financial companies spiraled out of control, where were the boards to rein in managements' excesses, not to mention excessive risk taking? Nobody was really minding the store for shareholders.
Plus, bankers have been among the most egregious in feeling entitled to high pay no matter what, regardless of true financial performance or concern for public shareholders (or the American taxpayer, for that matter). Apparently, one of the requirements for working in the upper echelon of the banking industry is a mind-bogglingly high level of out-of-control, myopic hubris.
This was clear pretty early on, when scandal erupted over AIG's (AIG 1.70%) intent to pay out big bonuses despite its recent public bailout. The U.S. government recently dumped a bunch of the insurer's shares, dropping its ownership in the bailed-out company to just 16%.
Meanwhile, we're still lacking proof that corporate managements and boards -- in this industry in particular -- have learned many lessons from teetering on the brink of financial cataclysm.
JPMorgan's (JPM 2.51%) Jamie Dimon has often been lauded for being one of the best financial CEOs, but this year's massive trading loss controversy, better known as the London Whale incident, lends to the sinking sensation that things haven't changed much on Wall Street.
Cleaning up Wall Street
Long-time Citigroup critic, CLSA analyst Michael Mayo, has reversed his bearish stance on Citigroup since Pandit's announcement. He's citing "a more proactive board," and the possibility that under new management, the company could improve its "poor governance," as well as work on fixing its rep with regulators.
In my book, there are tons of reasons why individual investors should avoid investing in the financial industry, particularly the too-big-to-fail monstrosities. The sheer level of complexity is a pretty basic one. I also distrust the industry hubris, and indications that the culture is still more than willing to pursue profits no matter what, and bray for bailouts when their bets go bad.
The entire financial industry needs a corporate governance reboot, and more proof that their leaders and boards are holding themselves accountable to shareholders. Hopefully, Citigroup's housecleaning will result in positive moves in that direction, and we'll see some serious changes in corporate governance on Wall Street, and every other corner of corporate America.
