Citigroup Provides Further Proof that the Board of Directors System is Broken

by Brian Johnson on April 23, 2009

Board RoomAP Business Writer Madelein Reid, in a recent article summarized the conflict between Citigroup Inc. and its shareholders at the company’s annual meeting.  The shareholders were rightfully outraged.  The Board seems unwilling to change most of its procedures or to give up any of its power to decide the future of the company.  It alone decides executive compensation packages—not the shareholders just as it alone decides that the company will fund a new stadium.  The shareholders, simply put, have no say.

Reid points out that the chairman of the board of directors amiably listened to the shareholders’ many complaints while keeping in good spirits and remaining polite and unflappable.  And of course, offering no indication that the shareholders’ opinions would have any affect on the business of the board or in the method by which the board would be run.  If the shareholders don’t want to support a new stadium, too bad for them.  As unhappy as the shareholders of Citigroup Inc. are with the company’s performance, all returning directors and the four new recommendations were voted in without much difficulty.  The board had not recommended anybody to run against the contenders for these positions…

In one of our premier articles here on Wallet Blog we discussed the problems with the current board of directors system in detail.  We pointed out that there is essentially zero accountability between the board of directors and the shareholders, and that if the shareholders feel that their company is being poorly run, they have little means by which to affect a change.  Citigroup Inc.’s annual meeting is a perfect example of this kind of helplessness.  The shareholders can take the microphone, they can complain, hurl insults, call the board of directors “communists,” but in the end, there is no effect.  The reason that the directors are able to politely take all the abuse is because it doesn’t really have any repercussions for them whatsoever.

If, instead, each 12.5% of the shareholder stock was associated with a board seat, allowing for shareholders immediate access to the directors as well as the ability to remove them from their posts, we imagine that this meeting might have gone much differently.  Directors would be inclined to listen to shareholders rather than simply ignoring them through polite nods.  What this meeting suggests to us is that the Board of Directors system, as we have said elsewhere, simply doesn’t work, that the directors operate without concern for those they represent, and that the system is designed to keep shareholders powerless.

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