Citigroup Inc may benefit from a push to install more directors with financial industry experience after a board heavy with Fortune 500 chief executives oversaw a disastrous push into risky debt.
Diversifying the board, whose chairman Richard Parsons is the only outside director with top-level financial services background, is likely to ensure greater oversight of the risks the bank takes and limit the potential for losses to mushroom further following a $37.5 billion deficit over five quarters.
The attempt to add financial experience to a board stacked with current and former chiefs of nonfinancial companies, including Alcoa Inc, AT&T Inc, Chevron Corp, Dow Chemical Co and Xerox Corp follows last month's U.S. government agreement to expand the federal stake in the third-largest U.S. bank to as much as 36 percent.
Those sound like strong names, said Ralph Ward, publisher of the Boardroom Insider and a corporate governance specialist. The government and the people watching Citigroup most closely are interested in whether you know your stuff and have competence in turnaround situations.
A shift could also presage a wider move among companies toward boards that seek out industry expertise, as well as heavyweight name recognition.
This could set a trend: the idea that your being a Fortune 500 CEO makes you a great generalist for other companies' boards may be a thing of a past, Ward said. We're moving into an age of specialists.
GOOD, STRONG SIGNAL
Citigroup wants to nominate Jerry Grundhofer, once chief executive of regional bank US Bancorp, to its board, a person close to Grundhofer said. The person did not want to be identified because of the sensitivity of the situation.
The Wall Street Journal, which earlier reported the appointment, said Citigroup also plans to nominate three other financial experts: former Bank of Hawaii Corp Chief Executive Michael O'Neill; William Thompson, a former co-head of bond manager Pacific Investment Management Co; and a specialist in risk management, perhaps a finance professor.
Citigroup has gotten $45 billion of taxpayer money in the last six months, but shares of the New York-based lender languish below $2 each.
It seems that Citigroup is sending a very good, strong and appropriate signal to the government and the market that it is taking its problems very seriously, said Lawrence Mitchell, a George Washington University law professor and author of The Speculation Economy: How Finance Triumphed Over Industry.
The bank is expected to name at least six new independent directors as part of a February government bailout.
It is replacing two directors who have reached retirement age and three inside directors. The latter include former U.S. Treasury Secretary Robert Rubin, who once led the bank's now disbanded executive committee.
Citigroup and US Bancorp did not return requests for comment. O'Neill could not be reached. Pimco spokesman Mark Porterfield declined to comment.
In 2007, Citigroup had considered Grundhofer and O'Neill for the chief executive job, according to a person familiar with the matter, who sought anonymity because talks were confidential. Vikram Pandit, a former Morgan Stanley executive, got the job and remains at the helm.
Parsons, best known as Time Warner Inc's former chief executive, once ran Dime Savings Bank of New York.
WORKING ITS BUTT OFF
Experts said Citigroup might still have had many of its problems even with more banking experience on its board.
Everybody genuflected to Bob Rubin, so he might have been a strong person to override, Mitchell said. But it's hard to say how much of this Citigroup would have avoided, because there were many financial institutions where management and the board overlooked what they knew or should have known about the kinds of investments they were making.
Luring Rubin was long considered a coup for Sanford Sandy Weill, the architect of Citigroup, but Rubin has since been faulted for allowing the bank to embrace too much risk.
Rubin in January admitted to failing to recognize the serious possibility of the extreme circumstances that would befall the financial system.
The issue was less who was on the board than how the board functioned and whether board members were encouraged to challenge assumptions being made, said Deborah Cornwall, managing director of Corlund Group LLC in Boston, which advises companies on leadership. If they didn't, that would doom any board, regardless of how many financial executives sat on it.
Richard Ferlauto, director of corporate governance at the American Federation of State, County and Municipal Employees, said Citigroup could use new directors with international experience. The bank operates in more than 100 countries.
Ferlauto also suggested the board consider whether Pandit is the right CEO to lead Citigroup out of its dire condition.
Regardless of who ends up on the board, experts agree the job will be time-consuming.
I wouldn't say it's a full-time job, but directors will have to work far more than ordinary directors in ordinary times, George Washington's Mitchell said. The legitimate expectation is that the board will work its butt off.
(Reporting by Jennifer Ablan, Diane Bartz, Paritosh Bansal, John Poirier and Dan Wilchins; Editing by Andre Grenon.)