If you followed the financial news on Tuesday, you undoubtedly learned that something extraordinary happened at Citigroup Inc.’s annual shareholder meeting. Citigroup’s shareholders preliminarily rejected the Board of Directors’ executive compensation proposal. One might ask why this is significant. After all, is not the purpose of an annual meeting for shareholders to express their views on management through their votes? That is what shareholders are supposed to do. But history shows that this is not what typically happens. Shareholders rarely reject management’s proposals; thus, the “no vote” at Citigroup is an important moment in the evolution of post-financial crisis corporate governance.
In 2008 and 2009, discussion about “say on pay” measures was ubiquitous. The nation was outraged about lavish Wall Street bonuses and excesses - justifiably so. The past several years rank as some of the nation’s worst from an economics standpoint, and numerous senior corporate executives made out like bandits. The examples are numerous. One that sticks out in my mind is the saga of John Thain, Merrill Lynch’s CEO. It’s hard to forget that this CEO spent millions redecorating executive conference rooms while the company he ran was on the edge of collapse.
This national discussion left a mark in Washington, D.C., and disclosure measures about executive compensation ultimately landed in the text of Dodd-Frank. The looming question, of course, has been what will these measures mean? The right to vote means little if you stay home on Election Day. Institutional shareholders have long had the ability to use their voting power (and their selling power) as a bully pulpit. The fact is that they have not often done so. The “no vote” at Citigroup may indicate that public shareholders’ collective memory is not as short as Wall Street might have hoped. Perhaps it is a signal that shareholders will no longer tolerate “business as usual” on Wall Street. If similar votes follow at other companies, the landscape of corporate governance may change significantly in the coming years – and for the better.
At Motley Rice, we recognize that part of our securities fraud practice depends on shareholders who are willing to step forward and litigate when it is warranted. We also recognize that litigation is only one tool among many. Shareholders and institutions in particular have other powers – that of the purse and the vote. If institutional shareholders do not like a certain aspect of corporate governance, they can show up and vote when given the chance or they can sell and invest in a company that they trust is doing things the right way.
Fans of trickle-down economics like to say that a rising tide lifts all boats. The problem in 2008 was that while the tide was receding and taking Main Street with it, Wall Street executives did not seem to feel the pain so acutely. I do not believe that Americans begrudge profit or even significant wealth when it is earned. I think, however, they were rightfully appalled in 2008 when the captains of finance walked away with generous severance packages and bonuses while average people got pink slips and shareholders lost everything.
I for one hope the vote at Citigroup signals a change in the tide and a new era of shareholder activism.