VideoIn business, nothing speeds forgiveness like success. Citigroup cranked out a record $4.1 billion in earnings from continuing operations in the first quarter of this year, and followed it with $4.3 billion the following quarter. That performance moved investors, who had driven the stock price down to $24.42 last summer as a result of Citigroup's repeat appearances in financial scandals, to nearly double it by mid-October.
But forgiveness didn't come without some very public penance for the financial-services giant. In April, the firm's Salomon Smith Barney division (now called Citigroup Global Markets) forked over $300 million in fines plus $100 million in additional restitution as part of the so-called global settlement with regulators over misleading research. As employer of the poster child for conflicted research—telecommunications analyst Jack Grubman—Citigroup's fines were the largest of any financial institution (see "The Global Settlement" at the end of this article).
Critics will note that the fines amount to less than a week's worth of earnings so far this year. Somewhat harder to dismiss are public expressions of regret by Citigroup executives—particularly given the number of still-looming shareholder suits—and the firm's laundry list of internal reforms (see "New Leaf or Fig Leaf?" at the end of this article). Prudential Equity Group's Mike Mayo derided some of those reforms last year as "just-in-time corporate governance," but even that notoriously bearish analyst had to bow to Citigroup's financial performance, upgrading the firm from "sell" to "hold" this past July. That same month, Citigroup settled enforcement proceedings with the Securities and Exchange Commission over structured financings for Enron and Dynegy, earning a curt acknowledgement for its cooperation.
CFO Todd Thomson insists Citigroup isn't just playing catch-up when it comes to reform—he claims it's now trying to use its enormous market presence to lead the way. And that includes setting some standards for what it will and won't do for its corporate customers.
"Anything Citigroup can do to show leadership in regaining trust with investors we should do," says the 42-year-old Thomson. That includes obvious corporate moves such as expensing options (despite his historical opinion that the accounting treatment is incorrect) and raising Citigroup's dividend by 75 percent.
When it comes to actually turning over a new leaf, of course, results are harder to gauge. The true test of Citigroup's reforms will be its ability to remain scandal-free despite its staggering breadth of financial offerings and sprawling global operations.
When it comes to his own finance organization, which spreads across more than 100 countries, Thomson, who took over as CFO in March 2000, shuffles finance executives around the world to make sure their ultimate allegiance is to his office in New York, not their local business unit. "I want to establish—and have established—a culture of integrity in the finance organization," he says. "That happens only if I'm viewed as having personal integrity."
At the very least, one can certainly say Thomson puts his money where his mouth is. Under Citigroup's so-called blood oath, executives must hold at least 75 percent of Citigroup shares they receive. "I have never sold a share yet," says Thomson. "One-hundred percent of my net worth is in Citigroup stock."
Senior writer Tim Reason sat down with Thomson in mid-September to discuss just how much Citigroup has changed, and what that might mean for its customers.
You had a record $4.3 billion in income from continuing operations in the second quarter. Given the turmoil of the past 18 months, you must be very pleased.
Yes, I think these are tremendous results. It's a testament to the dedication of the management team. To not be distracted by newspaper stories, but to stay focused on customers and on building a growing business was a terrific challenge. It's also a testament to the franchises we have here. We've got a credit-card business, a consumer-finance business, our corporate investment bank—those are all the biggest and the best-run in the industry. That allowed us to continue in a very difficult economic environment globally and deliver terrific financial results.
Last year was a terrible one for your stock price. Now your stock is back up.
Well you know, as CFO you're never satisfied with where the stock is. We're not getting nearly the premium we deserve. But I think it will come.
Is the premium low because of the economy, or is it the result of a lingering aftertaste of Enron, WorldCom, and all those other distractions?
I think it has less to do with some of those issues and more to do with the fact that the company really is only about five years old. It was created by combining CitiCorp and Traveler's at the end of 1998. If you look back over the past 10 years, earnings per share have grown more than 20 percent a year. But it takes a while for investors to get comfortable that going forward, the new company will deliver the same kind of performance.
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