Inside Financial Services

Why Executive-Compensation Clawbacks Are A Good Idea

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I was surprised earlier this month at the sympathetic tone of Robin Pogrebin’s article about ex-Citigroup CEO Sandy Weill’s philanthropic activities, in the November 7 New York Times. On the one hand, Weill’s philanthropy is impressive: the Times reports he and his wife have given away around $1 billion so far over their lifetimes, to worthy projects ranging from the Weill Cornell Medical College, to the Weill Music Institute at Carnegie Hall, to the Weill Bugando University College of Health Sciences in Tanzania. Well done, Sandy! But on the other hand, Pogrebin gives scant reflection on where that $1 billion came from in the first place. (By coincidence, Citi apparently paid Weill $1 billion, all in, in the decade prior to his retirement.) Weill’s fortune came about, of course, as a result of Citigroup’s earnings-much of which, we now know (thank you subprime mortgage lending!), were illusory during the time Weill approached retirement in 2006. And a good deal of the blame for why Citi ran off the rails can be laid at the desk of the fellow who created the company. Which is to say, Sandy Weill.

I worked for Weill for a time at Smith Barney, and admired him. But I suspect (as do others) that as his career progressed he got a little too far out over his skis. His ultimate creation, Citigroup, ended up being a vast complex of disparate, cobbled-together businesses that were never properly integrated and became impossible to coherently manage as a whole. IT spending was chronically short. In some units, compliance turned out to be spotty. I suspect that, in the end, Citi got undone by subprime lending the way it did simply because there was no mechanism in place to prevent that from happening. Regardless, by the time Weill left Citigroup, we now know, the company was a doomed enterprise.

And yet he gets to keep the $1 billion? Let the liberal New York Times, if it likes, write fawning profiles of local benefactors. But for all the business-bashing it engages in, the Times might also find resources for an article (in which Sandy Weill would be exhibit A) on why executive compensation clawback provisions, especially in financial services, are a good idea. There’s not much positive I have to say about the Dodd-Frank bill, but its clawback mandate is definitely a idea whose time has come. The 2008 financial panic was a complicated event, but I don’t think it’s too much to say that if comp clawbacks had been around in the early- and mid-2000s, the panic wouldn’t have been as severe as it was and might not have happened at all. Clawbacks certainly would have made the ensuing taxpayer bailouts a whole lot easier to take.

It’s ironic, too (and a little offensive), that as figures like Sandy Weill end up getting lauding profiles written about them, the executives who actually had the wisdom back then to not put their institutions at risk, people like JPMorgan Chase’s Jamie Dimon and Wells Fargo’s John Stumpf, find themselves vilified regularly. Weill made money for his shareholders when everyone made money for his shareholders, but left his company a ticking time bomb. Want evidence? As you read this, the S&P 500 is hitting all-time highs. Wells Fargo and JPMorgan Chase, similarly, are at or near all-time highs. Meanwhile, Citigroup, two bailouts later, is still 90% below the peak it set way back in 2000. Thanks, Sandy! But at least Sonoma State College has a new recital hall.

What do you think? Let me know!

21 Responses to “Why Executive-Compensation Clawbacks Are A Good Idea”

  1. RWS

    Dodd Frank was completely unnecessary. The situation could have been dealt with with 2 or 3 pages of legislation. For any bank that goes under or requires a government bail out, the directors all go to jail for at least 5 years with no sentence reduction and forfeiture of all paid compensation. There would be a dramatic shift in control at banks. The CEOs would no longer be able to run wild. I think in Japan in the early 1900s there was a law that said if a bank lost money for depositors all the directors would be put to death. Brazil at one time also had very tough penalties.

  2. Jim Engle

    Very well said, Tom. One further point: If CEOs get to keep the upsides and shareholders get the downsides, the temptation of taking on outsized risk will draw more hurricane Sandys and large scale problems will recur regardless of regulatory safeguards.

  3. AJN

    This should be posted on the NYT and WSJ opinion pages. Absolutely.

  4. jsc173

    Isn’t this what some call crony capitalism? If you grease the right palms, build a hospital or college building or something similar, it’s as though it’s atonement for your sins as a latter day robber baron. I left Citi because of Weill’s strategies, which only paid lip service to risk management. At the end of the day, he had no business being allowed to run a bank.

  5. RBI

    EXCELLENT. Well done. Horrific example of greed and gross overpayment. But at least Sandy is giving it away. It really wasn’t “his” money – no one deserves that kind of wealth for running a company and, perhaps he knows it and that is why he’s giving so much away. Let’s hope so. How about Stan O’Neal = got paid $160 million to walk away from Merrill and they went down the toilet a few years later. When they crucify Jamie Dimon, why is it that no one ever seems to talk about Stan O’Neal?

  6. rivvir

    His fortune earned off earnings off the subprime debacle? Doubtful. Enhanced, undoubtedly. But remember who was in charge of citicorp when glass-steagall was repealed? I don’t believe it was weill. Which side of the fence were you on or that one, Tom? I’m not defending weill. He was part of the group that set us on the path to self-destruction. But to single him out from among all the others of his type? Maybe only because you want to single out the nyt for reporting the facts? And over something weill did for the positive? That’s pretty petty. Where were you on this nyt story? I’m pretty sure i could’ve found other negative weill stories on weill if i had gone back further. Remember grubman? I sure do.
    “Does the Rot on Wall Street Reach Right to the Top?
    AS the latest in a long line of Wall Street morality plays, the one involving Sanford I. Weill, the chairman of Citigroup, and Jack B. Grubman, his firm’s former star telecommunications analyst, is unfolding in depressingly familiar fashion. But it differs too from some other dramas involving brokerage firm titans: thousands of individual investors lost millions of dollars because of what appear to have been self-interested actions by Mr. Grubman and Mr. Weill. The story so far: in early 199…
    November 17, 2002, Sunday”

  7. bawmah

    As a long time C shareholder, you are too damn right. He must have one very guilty conscience.

  8. Anon

    Instead of Sonoma State, Sandy should contribute the bulk of the money to the bonus pool at Citi, so that those of us who have kept the ship afloat after the captain steered it onto the shoals would see some return on our efforts.

  9. Frank

    How about ‘the Coppertone kid’, Mazilo. How that guy stayed out of jail is unbelievable!!

  10. Former SB employee

    Lets not forget about Robert Rubin’s position as Vice Chair that had no day to day responsibilities yet he made 150 million dollars for knocking down Glass Stegall.

  11. John

    I think it is far too easy to vilify Sandy Weill. He built a business that focused on intense cost management, employee ownership and risk management. He left the business in 2006. The toxic assets that blew the place up were largely put on the balance sheet between 2006-08. There was a time when geographic and product-line diversification was considered an asset (it was S&Ls that had too much exposure to a certain town’s real estate that would blow up, not a well-diversified business). There was a time when employee ownership was considered an alignment of interests (Sandy derived the vast majority of his net worth from Citi – over a couple of decades – and he would force his management team to keep the stock). But what most of us (and I make that the global “us”) didn’t realize is that there is a time when big becomes too big, when egos make it impossible to stop, and when dim-witted successors don’t understand the risk they are taking – and “dance while the music plays.” I think the story at Citi could have been different if Chuck Prince did not take over (and let the balance sheet take off). But I think all of us were in denial that sometimes big is just too damn big. If only Sandy would have made the commitment to stop growing in 2005 and turned Citi into a dividend-paying utility. But I have yet to see a CEO – in any industry – brave enough to make that strategic decision. Which means it is up to our regulators to break up and put a limit on a bank’s size.

  12. tom brown

    John, you say Sandy built a business built on “risk management”? Are you kidding me! If he left a company with strong risk management it wouldnt have been on the verge of failure 2 years later.

  13. Walter Schloss

    Weill was a crook from day one. His entire life was dedicated to stealing the contents of other people’s wallets.


    I dont think c would have had all that subprime if Weil had been at the helm instead of the lawyer after all he had Bob Rubin to keep to keep the lawyer out of trouble blame Rubin.

  15. Anonymous

    Right on the money article!
    Well done Tom

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