Citigroup Shareholders, Say on Pay, and Moral Suasion

Shareholders at Citigroup have voted against the pay packages granted to the company’s top executives. Under Dodd-Frank, major firms are now required to hold shareholder votes on executive compensation at least once every three years. But the vote held Citigroup’s annual meeting on Tuesday was historic: it was the very first time that shareholders at a major financial firm have used this mechanism to express displeasure.

OK, now what? Well, that’s not entirely clear. Such votes are non-binding, and so the Board at Citigroup is legally entitled to ignore this recent vote entirely. But a widely-cited statement from the company includes the following assertion: “The Personnel and Compensation Committee of the Board will carefully consider their input as we move forward.” But really, what does that mean? And really, what should a Board of Directors do in the face of such feedback?

One problem is that a simple yea or nay vote is not very eloquent: there can be lots of reasons for saying “no” to a compensation package, and of course speculation is rampant. The Board (and its Personnel and Compensation Committee) now needs to talk to major shareholders — presumably it is already doing so — to find out what the problem is.

One analyst has been quoted as noting approvingly that this vote means the owners of big corporations are finally yanking the leash, a move towards getting things back under control. Mike Mayo, author of Exile on Wall Street, says that “[T[he owners of the big banks, namely the shareholders, are finally taking a greater amount of responsibility by speaking up.” The thinking here is that shareholders may have been objecting not just to Citigroup CEO Vikram Pandit’s $15 million dollar pay, but also to the $10 million retention payment awarded to him, and the general lack of correlation between Pandit’s pay and the company’s financial performance.

But then, while the idea that shareholders “own” the company is common, it is not uncontentious. The connection between most shareholders and the company is indeed pretty tenuous. And regardless of ownership claims, lots of people reject the idea that shareholders have any special role here, or that their voices should count for more than the voices of other stakeholder groups. Under such a view, a shareholder say-on-pay vote deserves little more than a shrug. After all, if shareholders are just one more stakeholder group, then evidence that they don’t approve of CEO pay is no more important than evidence of similar disapproval on the part of workers or suppliers or whomever.

But a shareholder vote has to count as more than just one more bit of moral suasion. For better or for worse, shareholders are, under most companies’ systems of governance, the ones to whom all insiders, including the CEO and Board of Directors, swear allegiance. Managers don’t promise to make a profit — such a promise would hardly be credible — but they do promise to at least try to make a profit, to have something left for shareholders after the bills are paid. It’s the one bit of accountability that every CEO, regardless of political persuasion, pays homage to.

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