Why Citi is still keeping the CEO and chairman roles separate

In naming an independent director as its next chairman and not elevating CEO Michael Corbat to the post, Citigroup appears to be signaling to investors that it will keep the roles of chairman and CEO separate until its performance meaningfully improves.

Citi’s board of directors said Monday morning that it had tapped former banking regulator John C. Dugan to serve as chairman, succeeding Michael O’Neill, who is retiring at the end of this year.

Dugan served as comptroller of the currency from 2005 through 2010, and more recently had been a partner at the law firm Covington & Burling. He joined Citi’s board in October 2017.

O’Neill’s retirement had been expected — he had reached the mandatory retirement age of 72 — and there was some speculation that Corbat, who has been CEO since 2012, would be given the additional title of chairman.

By keeping the roles separate, Citi is taking a markedly different tack than most of its peers.

Wells Fargo, which separated its chairman and CEO roles in the wake of its phony-accounts scandal, Goldman Sachs and Ally Financial are among the financial firms with independent chairmen, but the majority of large and regional banks have combined the roles.

Cliff Rossi, a finance professor at the University of Maryland, said the decision to keep the CEO and chairman roles separate means that Corbat can focus more of his attention on improving the company’s financial results.

“They’ve done a ton of work over the past 10 years to right the ship, and Corbat should be very pleased with his performance,” said Rossi, who previously served as a chief risk officer within Citi’s consumer lending division. Still, he added, keeping an independent chairman on board also sends the message that Citi’s turnaround, following its near-collapse during the crisis, isn’t quite finished.

“Maybe it’s, ‘Hey, Mike. We need you to focus on continuing to press on getting things done at Citi,’ ” such as boosting revenue, Rossi said. “I could see it.”

Citi last year set a target of improving its return on tangible common equity — a key profitability metric — to 11% by 2020. The company this year increased that goat goal to 13.5%, following the enactment of the corporate tax cuts last year.

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At Sept. 30, that metric stood at 11.3%. While that’s an improvement from a year earlier, when the ratio stood at 9.9%, it’s still well below that of its biggest competitors. JPMorgan Chase’s return on tangible common equity was 17% at Sept. 30 and Bank of America’s was 15.3%.

In a research note to investors, Wells Fargo analyst Mike Mayo praised Citi’s decision to keep the roles separate and said that Dugan’s presence as chairman will bolster its risk management.

At the same time, he said that Dugan would need “to hold current management accountable” for improving the Citi’s results, which over the past year have been “aided so much by tax cuts, interest rate hikes and more-than-previously-expected capital return.”

It is unclear if the board considered Corbat for the post, but according to news reports, the CEO chose not to seek the chairman position to avoid the distraction of a potential showdown with investors.

In a statement, Corbat said that Citi “is deeply committed to maintaining strong corporate governance standards” and that “shareholders have been well served by having an independent chairman.”

Corbat added that he has appreciated the insight Dugan, 63, has brought since he joined the board last year and that he looks forward to working with him as chairman.

Despite a consensus from good-governance experts that keeping roles separate provides a necessary check on management, most banks have been moving in the opposite direction of Citi.

Bank of America, for instance, gave CEO Brian Moynihan the chairmanship in 2014, five years after investors stripped the title from former CEO Ken Lewis. Fifth Third Bancorp, which had stripped former CEO Kevin Kabat of his chairmanship in 2010, elevated current CEO Greg Carmichael to the role earlier this year.

U.S. Bancorp CEO Andy Cecere also added chairman to his title in January.

“Ten years after the crisis, we forget what got us into trouble was bad governance,” said Rossi, who said he supported Citi’s decision to keep an independent chairman on its board.

Charles Elson, the director of the John L. Weinberg Center for Corporate Governance at the University of Delaware, said that maintaining a separate chairman and CEO “enhances performance” by establishing the board as independent from company management.

“It’s the right thing to do,” Elson said, discussing the announcement at Citi. “Their investors have called for it.”

More so than its peers, of course, Citi has carried with it for years the baggage from the crisis, in the form of lagging financial results and lingering regulatory headaches.

Two years ago, for instance, Keefe, Bruyette & Woods called on the company to break itself up, to improve profitability and return excess capital to shareholders more quickly.

Citi has also struggled with regulatory issues, having paid millions in fines to federal regulators for failing to provide sufficient oversight of anti-money- laundering controls in its Banamex banking division, which is based in Mexico and is now known as Citibanamex.

Still, the company has taken major steps to restructure its operations, including exiting consumer banking in several overseas markets, such as Brazil and Argentina, and bolstering its digital banking offerings to U.S. consumers.

“We have a unique and resilient franchise, which isn’t going to be replicated at anytime soon,” Corbat said at Citi’s investor day in July 2017. “It’s been focused and it’s been restructured.”

With the appointment of Dugan, in particular, Citi will benefit in the years ahead from having a chairman who can help guide the company through a rapidly changing regulatory environment, according to Rossi.

“Having someone like Dugan who knows Citi and the regulatory structure so well … I think gives Citi a lot of ammunition to be able to tell investors that it’s a great story, and that we’re doing the right thing here,” Rossi said.