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Citi Board the Worst, Study Says

Report gives Citigroup board a failing mark; Allstate and Disney make the F-troop, too. Plus: M&A market starting to hot up, pension plans cutting into corporate spending, and RJR CFO gone in a puff of smoke.
John Goff, CFO.com | US
June 10, 2003

It's been a tough few months for Citigroup Chairman and CEO Sanford Weill.

In late April, Weill announced that Citigroup had agreed to pay $400 million to settle charges that Citi and nine other investment banks had allegedly issued pollyanna stock research to curry favor with investment banking clients. Later, Weill withdrew his nomination to the NYSE board of directors because of the fallout from that settlement. Then, in early June, news broke that securities regulators had requested to see E-mails from Weill and the CEOs at eleven additional Wall Street firms to see if the chief executives had any idea that analyst research had been influenced by investment banking considerations.

Yesterday, Weill got some more good news. The Corporate Library, an independent research firm that provides analysis of corporate governance issues, announced that Citigroup had received the lowest rating in its annual Board Effectiveness Rating.

The study by the Portland, Maine-based, Corporate Library examined the boards of the 1,700 largest companies in the U.S. "The business meltdowns of the last two years have proven that there is a category of 'governance risk' that investors want to understand more fully," said Ric Marshall, The Corporate Library's CEO. "But the post-Enron reforms have led to over-focus on compliance and structural indicators."

Nine other businesses got a failing grade from The Corporate Library: In alphabetical order, they are:

Several of the companies on the list, including Disney, have actually received a fair amount of press for recent governance initiatives. But in explaining the results of the survey, Nell Minnow, editor at the Corporate Library and a noted shareholder activist, asserted that good corporate governance is more about intent than policies.

"Investors should be less concerned what the governance policies say, or what I call 'resume independence' than they are with the practice of independent judgment," Minnow said. "We do not evaluate directors on what they say they do; we evaluate them on what they actually do. We grade them on how well they handle the toughest calls."

Researchers at the Corporate Library lambasted Weill for allegedly trading preschool admission for a more favorable analyst report on AT&T. The shareholder activist group also criticized the Citigroup CEO for not taking a bigger financial hit over the $400 million Wall Street settlement. According to the report, the fine was paid by Citi's current shareholders (and the shareholders of Citi's insurers), "not by any of the people responsible."

Marshall also lauded Colgate-Palmolive CEO Reuben Mark for his "willingness to stand up to Weill and his other fellow directors at Citigroup over the issue of CEO succession planning -- one of the most critical tasks facing any board."

Indeed, Minnow noted that living up to the letter of the law does not necessarily make for good governance.

For instance, the survey took into account the willingness of boards to adopt shareholder-approved resolutions. Minnow offered the example of Maytag, which rates quite high according to many best practice benchmarks for governance -- including director independence. "But for three years running they have refused to enact shareholder proposals that were approved by a majority vote," said Minnow. "What clearer demonstration of a board's failure to understand their obligation to shareholders can you get?"

As for a few of the other companies receiving a failing mark: The report criticized Emerson for its perk-filled compensation contract with Chairman C.F. Knight, dubbing the deal "a shareholder nightmare." The study also came down hard on Disney, charging that governance reform in the Magic Kingdom has "been slow, grudging and often inherently crippled or compromised, tailored to meet the letter rather than the spirit of the relevant tax, legal and regulatory standards."

The report skewered Allstate as well, noting that the insurer appears to comply with most governance best practice standards. But according to the study, those practices are "backed in reality by a weak, ineffectual board, and a near total absence of vested owners to complain about it."

Interestingly, consultancy GovernanceMetrics International launched a governance-tracking system of its own last year. At the end of December, the firm announced it had rated all of the companies that make up the Standard & Poor's 500 Index. Based on that system, just 5 of the S&P 500 received the highest rating of 10, which GMI describes as "well above average" in governance policies and practices. The five companies? Johnson Controls, MBIA, Pfizer, SLM, and Sunoco.

(Editor's note: To read an exclusive CFO interview with the Corporate Library's Nell Minnow, click here.)


So Happy Together: M&A Picking Up
Yesterday, outgoing White House press spokesman Ari Fleischer said the trend for U.S. economic growth "appears to be going up." Added Fleischer: it's a question of how far up and how fast ... This does remain an economy that has mixed signals."

One not-so-confusing signal: the M&A market appears to hotting up. Economists say increasing M&A activity often signals an economy on the upswing, as executives seek to make deals before corporate earnings -- and hence, stock prices -- shoot up.

Several fairly large acquisitions have been commenced in the past few days.

On Friday, Oracle announced an unsolicited, all-cash bid for rival PeopleSoft, which just days earlier, indicated it would be acquiring smaller ERP vendor J.D. Edwards for $1.7 billion. The proposed Oracle offer for PeopleSoft, which was not exactly warmly received by PeopleSoft CEO Craig Conway, tips the scale at a little over $5 billion.

On Monday, several more deals were announced.

Management at ConAgra Foods Inc. said it was selling its chicken processing business to Pilgrim's Pride Corp. Under the terms of the deal, which was valued at close to $600 million, ConAgra will receive $100 million in cash, $235 million in Pilgrim's Pride common stock, and $255 million in subordinated notes (payable by Pilgrim's Pride to ConAgra.)

ConAgra, which is based in Omaha, will take an aftertax charge of 14 cents per share in the fourth quarter, on a pretax charge of $112 million relating to lowering the book value of its chicken processing assets.

The sale appears to be part of the company's move out of the commodity food business. In announcing the deal, ConAgra management said it wanted to focus on the company's wide array of national brands, including Butterball, Chef Boyardee, and Hebrew National.

Conversely, the transaction will make Pilgrim's Pride the number two processor of chicken in the U.S., trailing only Tyson Foods. Pilgrim will take over 16 plants and 15 distribution centers from ConAgra. Those facilities currently employee 16,000 workers.

Management at Pilgrim's Pride -- which, incidentally, is named after Chairman Lonnie Pilgrim -- expects the transaction to be finalized the summer. The company claims it back out of the deal if its average stock price falls below $5.35 during the waiting period preceding the closing of the deal. As of the market close on Friday, shares of Pilgrim's Pride were trading at $8.95

Off the farm, defense contractor General Dynamics reported it had agreed to purchase homeland security company Veridian Corp. The Falls Church, Va.-based General Dynamics will pay $35 in cash for each Veridian share and assume Veridian's $270 million in debt.

Veridian, based in Arlington, Virginia, makes chemical, biological and nuclear detection systems. The deal, valued at about $1.2 billion, pushed the stock price of Veridian sky-high yesterday. Shares of the tech specialist closed at $34.48, up a full $7.13 for the day. The share price of General Dynamics was slightly down for the day.

Pensions Cutting Into Capital Spending
Based on the results of a survey conducted by SEI Investments, it appears that mid-size companies are struggling mightily with under-funded pension plans.

According to the survey of 151 companies (with average pension assets of $181 million), nearly a quarter of the respondents said they are already cutting back on capital expenditures because of rising pension obligations. Another 11 percent expect their spending to be effected by pension plan problems.

Another quarter of the respondents said they're concerned that under-funding of their corporate pension plans will put them at a competitive disadvantage.

Even more worrisome: 58 percent of the surveyed companies indicated that their pension plans had lowered their companies' profitability. Other financial consequences of pension funding woes include cash-flow problems, reduced share price, and reduced dividends.

"The scope of the damage to mid-sized companies is sobering," said Jim Morris, senior vice president at SEI. "Without the ready access to capital markets enjoyed by bigger corporations, these companies face tougher choices when facing pension funding pressures."

Indeed, half of the surveyed companies are adjusting their pension plan investment strategies, while 44 percent are increasing contributions. Further, 27 percent are considering closing their plans and/or converting their traditional defined benefit plans to less-onerous defined contribution plans.

It's not clear whether these moves will solve the problem, however. In fact, 83 percent of the respondents said they're still looking for a way to manage their pension plan funding problems.

They're no shortage of consultants out there offering up suggestions, either. Nine out of ten of the plan sponsors say they employ more than one advisor for help with their pension plans.

What's more, one-quarter of the respondents said they use six or more pension advisors.

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