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Perspectives on Citigroup's Negative Say-on-Pay Vote

(The following post originally appeared on ONSecurities, a top Minnesota legal blog founded by Martin Rosenbaum to address securities, governance and compensation issues facing public companies.)

May 1, 2012

As the 2012 proxy season kicks into high gear, Citigroup’s negative Say-on-Pay vote a couple of weeks ago remains the big story. Because of Citigroup’s size and prominence, the vote received a lot of commentary in newspapers and blogs. As Mark Borges pointed out in the Proxy Disclosure Blog on (subscription site):

This turns out to be Citigroup's fourth "Say on Pay" vote since 2009 - the first two were as a participant in the Troubled Asset Relief Program. I took a look at the support for the company's executive compensation program over this entire period, which went from 82% in 2009, 89% in 2010, and 93% in 2011 to just 45% in 2012. So it appears that there was a fairly consistent level of support for the program, which spiked in 2011 (the second consecutive year in which the company's CEO received essentially nominal compensation - $1 in 2010 and $128,000 in 2009) before the bottom fell out.

One lesson to be learned from the Citigroup experience: take nothing for granted. Because the vote was so positive the past several years, the company might have been blindsided by a wave negative shareholder reaction this year. As Borges pointed out, Citigroup’s CD&A disclosure this year matter-of-factly explained that the compensation committee viewed last year’s 93% support as an endorsement of its existing approach: “The committee considered the outcome of the most recent say-on-pay vote and stockholder perspectives [from stockholder engagement efforts] generally as factors in the 2011 compensation process. . . .”

In hindsight, maybe Citigroup should have anticipated tough sledding. Unlike 2009 and 2010, when the CEO, Vikram Pandit, had received compensation of $1 per year, in 2011 the story was very different, as Steven Davidoff pointed out in a DealBook post:

Last year, the Citigroup board paid Mr. Pandit almost $15 million, plus one-time retention awards with a potential value of $34 million, as calculated by I.S.S. The proxy advisory firm recommended against Mr. Pandit’s package because parts of his awarded pay were not based on Citigroup’s financial performance, Citigroup stock had declined by more than 90 percent in the last five years and Mr. Pandit’s pay package was not in alignment with that of his peers. . . . Citigroup in part defended this pay package by arguing that Mr. Pandit had not received a meaningful salary for the three previous years, being paid only a dollar a year. This was nice of Mr. Pandit, but it must be put against the fact that Citigroup paid about $800 million to acquire Mr. Pandit’s hedge fund, Old Lane, an investment that Citigroup subsequently wrote off completely. And Mr. Pandit received an $80 million payment from Citigroup last year as part of the Old Lane buyout. He’s not about to become part of the 99 percent anytime soon.

When ISS recommended a vote against Citigroup’s executive pay, the company could have filed and mailed supplemental proxy materials to tell management’s side of the story. As Semler Brossy points out in its latest weekly Say-on-Pay update (PDF), many companies, perhaps most, have responded to a negative ISS recommendation with supplemental proxy materials. Although Semler Brossy does question whether such supplemental materials have a material impact on the ultimate results of the vote, the practice does give the company an additional chance to tell its story.

Not that the Citigroup proxy statement was inadequate. It certainly seemed to follow many of the best practices of compensation disclosure, including a robust summary at the beginning of its CD&A disclosure. On the other hand, there’s a lot of information to digest in the summary, and they certainly did not follow the practices of some companies that are making effective use of graphics to make their point. Compare the proxy statement filed by Coca-Cola this year, which uses charts, tables and color captions really effectively to tell their story. Maybe graphics would not have been enough to save Citigroup’s Say-on-Pay vote, but they probably wouldn’t have hurt.

Future Trends in Proxy Materials as PR Pieces

Coca-Cola obviously put a huge amount of effort into its proxy filing, and I think that’s a trend that will continue in the future, fueled by examples of negative votes like Citigroup’s. I can envision public relations and graphics firms getting more involved, and proxy statements and supplemental materials will look more and more like political campaign mailings. For another example, see the graphics in this very impressive glossy supplemental piece, filed by Exxon Mobil as a companion to their proxy statement for the second year in a row.

Sue-on-Pay Is Still With Us

As has been widely reported, Citigroup was sued in federal court almost immediately after the negative Say-on-Pay vote. Mark Borges reported that this is the 11th “sue-on-pay” case based on a failed shareholder advisory vote. The sheer size of this case is likely to ensure that it will capture public attention.


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