In the autumn of 2012, Trillium Asset Management LLC, on behalf of the Benedictine Sisters of Mount St. Scholastica, along with the AFSCME Employees Pension Plan filed a shareholder proposal with Citigroup Inc. (NYSE: C) asking the company’s board of directors to explore a possible separation of one or more of its business units.
Despite some positive steps taken since the start of the financial crisis, we believe Citigroup’s progress toward simplifying and de-risking its business has been slow and incomplete. Citigroup boasts many attractive attributes, but remains burdened by excessive complexity, as well as the stigma and risks associated with being named a ‘too big to fail’ institution.
Citigroup’s shares have consistently traded at depressed levels for years, both relative to financial peers and to the market as a whole. Citi’s unwarranted complexity has cost its stockholders billions of dollars in legal expense, breakdowns in risk management and other costly charges. Regulators continue to forbid Citi from returning capital to stockholders due to concerns over its financial stability.
The text of the resolution follows:
Strategic Alternatives (Too Big to Fail) – Citigroup, Inc. (2013)
Resolved, that stockholders of Citigroup Inc. (“Citigroup”) urge that:
1. The Board of Directors should promptly appoint a committee (the “Stockholder Value Committee”) composed exclusively of independent directors to explore extraordinary transactions that could enhance stockholder value, including but not limited to an extraordinary transaction resulting in the separation of one or more of Citigroup’s businesses.
2. The Stockholder Value Committee should publicly report on its analysis to stockholders no later than 120 days after the 2013 Annual Meeting of Stockholders.
3. In carrying out its evaluation, the Stockholder Value Committee should avail itself of such independent legal, investment banking and such other third party advisers as the Stockholder Value Committee determines is necessary or appropriate in its sole discretion.
An “extraordinary transaction” is a transaction for which stockholder approval is required under applicable law or stock exchange listing standard.
Despite some positive steps taken since the start of the financial crisis, we believe Citigroup’s progress toward simplifying and de-risking its business has been slow and incomplete. Citigroup boasts many attractive attributes, but remains burdened by excessive complexity, as well as the stigma and risks associated with being named a “too big to fail” institution. These factors could threaten stockholder return through breakdowns in risk management, increased regulatory scrutiny, higher litigation expense, greater capital requirements and poor public perception, among other challenges.
Citigroup’s shares have consistently traded below book value since late 2008. Citigroup failed the Federal Reserve’s CCAR stress tests in March 2012 and regulators continue to forbid it from returning significant capital to stockholders due to concerns over its financial stability. A recent survey of U.S. consumers by the Reputation Institute ranked Citigroup’s reputation as 146th out of 150 major companies included in the study.
While there are economies of scale in banking up to a certain level, a point can be reached where the complexities of operation become such a burden that further growth reduces profitability. The evidence is mounting that Citigroup has reached the point where stockholders would benefit from restructuring. A growing number of market experts, including former Morgan Stanley CEO Phil Purcell and former FDIC Chair Sheila Bair, have voiced this opinion.
Citigroup has a number of business units that could thrive individually. At present, however, these businesses are managed together in a financial conglomerate that houses nearly $2 trillion in assets, billions more in off-balance sheet exposures, and approximately a quarter of a million employees across 140 countries with dozens of separate interest rate and currency regimes. Allowing Citigroup’s healthy business lines to operate independent of the overhang posed by the parent company’s complex risk exposures could ultimately prove more fruitful for stockholders than continuing on the present course.
We urge stockholders to vote for this proposal.
US banking and financial analyst Mike Mayo, of CLSA, which is Asia’s leading and longest running independent brokerage and investment group, has published a research piece supporting the shareholder proposal.
“[T]his proposal is about disclosure, which is poor at Citi as it fails to disclose capital and returns by business line (in contrast to peers)”, Mayo writes. “… [Trillium's] Citi proposal is solely financially based despite the firm’s view and mandate that it be socially responsible, too”, Mayo continues. “Trillium’s view is that the onus is on Citi as to why it should not break up. We agree.”
Action Items for Current Citigroup Shareholders
1) Vote your Citigroup proxy in favor of the proposal if you hold shares.
2) Tell your mutual funds to vote in support of the proposal.
3) Urge your pension fund to publicly support and vote for the proposal.
4) If you are a member of a university community, foundation or non-governmental organization with an endowment, please encourage the trustees of the endowment to vote in favor of the proposal.
5) Speak out publicly in favor of the proposal in op-eds, blogs and other media venues.
The views expressed are those of the authors as of the date referenced and are subject to change at any time based on market or other conditions. These views are not intended to be a forecast of future events or a guarantee of future results. These views may not be relied upon as investment advice. The information provided in this material should not be considered a recommendation to buy or sell any of the securities mentioned. It should not be assumed that investments in such securities have been or will be profitable. To the extent specific securities are mentioned, they have been selected by the authors on an objective basis to illustrate views expressed in the commentary and do not represent all of the securities purchased, sold or recommended for advisory clients. The information contained herein has been prepared from sources believed reliable but is not guaranteed by us as to its timeliness or accuracy, and is not a complete summary or statement of all available data. This piece is for informational purposes and should not be construed as a research report.