It is a corporate governance issue as much as anything else. Can one shareholder essentially “fire” most of a public company’s board without the approval of other shareholders? That it what the federal government proposes to do with Citigroup (C) and it raises the issue of whether the board has lost de jure control of the company.
Since Citigroup needs more money, it is not in a position to dictate terms. According to The Wall Street Journal, “As a condition, the government is demanding that the New York company overhaul its board of directors, the people said. Treasury will call for Citigroup’s board to be comprised of a majority of independent directors.” Since the government is instrumental in overhauling the board, it is fair to question how “independent” these new directors will be.
The action by the government could be viewed as a violation of shareholder rights. The bank is not holding a special meeting for shareholders to approve the new slate. It is not clear how they will be picked. The fact that they will be picked at all is troubling.
The move by the government is insidious and clever. The notion that US banks will be nationalized has disturbed the Fed and many members of Congress. A nationalization of Citi could lead to its bondholders taking huge losses. Since many of those holders are insurance companies and pension funds, a collapse in the value of Citi’s debt would trigger another round of government rescues.
But, no matter how it gets expressed, Citigroup is not run by its board, and shareholders have lost their voice.
Douglas A. McIntyre
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