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Banks, Citi and the dark arts of eternal restructuring
Perils and perks of lashing CEO comp, accountability to share price performance
Keith Mullin 19 Sep 2023
Keith Mullin
Keith Mullin

I have long wondered what really gives rise to bank management restructurings and what it is that allows the management consultants who come up with them to convince CEOs they’ll make a difference.

I’ve sat and watched decades of broadly identical bank restructurings and strategy revamps come and go and I can safely say I don’t think any of them, in and of themselves, has actually made a blind bit of difference. I’m not even sure anyone can really tell. But what I’ve come to realise over the years is that I don’t think making a difference is actually the point of restructurings.

I think the point is to give shareholders, the general market, staff and other stakeholders the impression that senior management and the board are earnestly engaged in the task of doing something, anything. Not to create the banking utopia they claim the restructuring will lead to but to fix a problem. Typically a big problem. And one that management tries to convince everyone has been caused by the previous management structure.

It never is.

Of course a vital component of restructurings is to convince you, whoever you are, that what is being done is for YOUR benefit. And the circus trick with restructurings has always been for the bank to restructure again in some form or another – with the old CEO still in situ or with a new one at the helm – before anyone really has a chance to figure out if the previous one was successful or not.

Consultant playbook

When I heard Citigroup CEO Jane Fraser say, right at the beginning of her comments at the Barclays Global Financial Services Conference last week, that the changes the bank had announced earlier that day were the most consequential to how Citi will be organized and run in almost 20 years, I immediately started to glaze over. And to be honest, I didn’t get to the end of Fraser’s 20+ minutes of narrative because I had zoned out.

To be sure, it’s nothing to do with Fraser herself; she’s clearly a highly accomplished professional. But it was because here was yet another narrative right out of the consultant’s playbook delivered in that rather monotoned, technocratic, slightly aloof, not-altogether-convincing, I-ate the-consultant’s-PowerPoint-for-breakfast, buzzword-heavy way that CEOs tend to adopt.

So it was all about reducing spans of control, simplifying, streamlining, flattening, aligning, cutting out redundancy and overlap, driving clearer accountability, benefiting from natural linkages, strengthening client delivery (naturally); all geared to unlocking value potential in order to deliver better returns to shareholders over the medium term. How many times have we heard that before?

Buying time

The avowed beneficiaries of restructurings are either clients or shareholders. Citi’s latest re-org is clearly focused on its shareholders. Which leads me to ponder whether it’s Citigroup that has the problem or its CEO of two-and-a-half-years. The latest re-org is a ticket to buy time to get the stock price up.

Fraser’s problem is that since taking the corner office on February 26 2021, the group’s share price has slumped by a third. As such, it has woefully under-performed the other US globally significant institutions. Bank of New York Mellon, JP Morgan Chase, Morgan Stanley, State Street and Wells Fargo have all seen their shares flat to higher in the period since Fraser took over at Citi.

Even embattled Goldman Sachs, subject to serial tabloid coverage over its love-him-or-hate-him day-job boss David Solomon’s strategic wrong turnings, use of private jets, leadership style and irritating side-gig – and I mean really irritating – as a house music DJ, has fared better. Only Bank of America has seen its shares lose value over the same period, although they have still materially outpaced Citi.

Again, to be crystal clear, I am not saying the stock under-performance is down to Fraser, who has done nothing particularly egregious since she took over. But it’s Fraser who owns the problem. And the problem is that share prices are subject to myriad factors. It’s rarely clear what’s going to put a rocket under them, and there’s rarely a straight-line relationship between share price and financial performance. If things do turn around, it takes time but there’s zero guarantee that things will turn around.

At Citi, this is Fraser’s problem not just because she’s CEO but because her compensation has been tightly lashed to the mast of the share price. Her maximum comp for 2022 was set at US$24.5 million. Base salary was US$1.5 million while the 2022 incentive package amounted to US$23 million. Of the latter, the compensation committee bumped up the proportion paid in deferred Citi stock by 75%, from 20% in 2021 to 35%. Fifty per cent was in the form of Performance Share Units. The proportion paid in cash was cut in half, to just 15%.

The changes in the comp split were designed to align Fraser’s incentives with the interests of shareholders. But while Citi’s proxy statement noted that Fraser’s leadership to meet Citi’s strategic objectives in 2022 was exemplary, and that she established a clear set of priorities for Citi to increase shareholder value over time, the shares have done nothing.

Hence, the latest actions. The downside is that if shareholders and the general market fail to buy the Citi story over the medium-term span of Fraser’s strategy revamp and organisational restructuring, it’ll mean the value of her comp package will slide at the same time as that of the shareholders to whom she’s now so tightly bound, and they will squarely blame her and demand her head on a platter.

Accountability starts and stops at the top.

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