The 99% Speak

The 99% issued a clarion call to CEO's and corporate boards all over America this week. I commented recently that America has not heeded President Obama's call for a new age of accountability, but this is the clearest signal yet that this may be changing.

Under the Dodd-Frank Act, which was signed into law July 21,2010, corporate stockholders have the right to cast a non-binding vote approving or disapproving the compensation packages of senior management.

In a vote held this week, 55% of Citigroup investors rejected the proposed pay package for the senior management, most notably the $15 million pay package for Vikram Pandit, the current CEO.

And why not. Mr. Pandit took over the position of CEO in Dec. 2007. Since then Citigroup's stock has had an annual return of -44%. The 5 year price chart for the stock, shown in the link below, looks like a great ski slope, but a bitter disappointment for anyone who wanted to make money.

http://www.marketwatch.com/investing/stock/c

The pay package would have brought Mr. Pandit's compensation back to the level seen before the price of Citigroup stock collapsed.

Forbes Magazine, which is famous for its list of the 400 richest people, also publishes an annual list of America's best and worst bosses. To qualify for the list, you have to have a six tenure as CEO. As previously mentioned, Mr. Pandit has only been CEO for about 4.5 years. But if that criteria were discarded, then Mr. Pandit would fall solidly in the middle of the pack on the worst boss side.

There are two questions which will be answered in the coming weeks. First, will the board of Citigroup pay attention and compensate Mr. Pandit in accordance with the wishes of shareholders? Second, will those same shareholder stay on top of the situation and fight for compensation more closely in line with stock performance? I hope the answer to both questions is yes.

I have heard the argument made on a general basis that this level of compensation is necessary to retain the best talent. In Mr. Pandit's case, that argument borders on insanity. Even in general, it is a ridiculous assertion to make. The assumption made is that there are only a few hundred or maybe a few thousand people in the world who could do the job as well as Mr. Pandit. That is a lie that the big corporations would love you to keep believing.

The fact of the matter is that there are hundreds of thousands or perhaps even millions of people who could perform that function effectively. Didn't we just pass the 7 billion mark in world population last month? Let's assume that only 1/10 of one percent of the people in the world could do the job as well as Mr. Pandit. Remember, that's calling a guy who averaged a loss of 44% annually effective. But that is still 70 million people. And I'm sure that a vast majority of them would take the job for less than $15 million a year.

Let's call a spade a spade. A CEO's pay should be directly linked with the valuation of the company. Of course, Citigroup's board may just be arrogant enough to ignore the will of its shareholders. But then let's see what happens the next time the board comes up for a vote.

I applaud the action of the Citigroup shareholders. Let's hope the groundswell that signals a new age of American activism carries over to the area of corporate governance.