March 29, 2023

DealBook: In Citigroup Shakeup, a New Show of Power by Boards

Michael O'Neill, the chairman of Citigroup, in 2009.Shannon Stapleton/ReutersMichael O’Neill, the chairman of Citigroup, in 2009.

The departure of Vikram S. Pandit shows clearly who is in charge of Citigroup: the board of directors. For good or for bad, boards are increasingly taking charge of corporate America. The reign of the imperial chief executive is over.

No reason was given in the news release announcing that Mr. Pandit had stepped down. And while the reports of what happened behind the scenes will slowly emerge as each side spins its story, there is no doubt that this was an unexpected and abrupt resignation. He left without the words that you usually see in such announcements about “spending more time with your family” or even language about “retirement” — and just as his compensation was beginning to rise again into the tens of millions of dollars.

The new show of power by the board is a remarkable turn of events. In the years leading up to the financial crisis, boards were criticized for letting chief executives rule unchecked. Remember, Citigroup was the place where Sandford I. Weill reigned supreme for years. It led to Charles O. Prince III, who lacked the ability to run the financial conglomerate but also lacked a board that could appropriately supervise and monitor his actions let alone make a decision about the direction of the company. (Mr. Prince was the one, you may recall, who said in the years leading up to the financial crisis that “as long as the music is playing, you’ve got to get up and dance.”

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Board supremacy is a general trend. In the wake of the financial crisis, the big banks have been forced to reconstitute their boards, with Citigroup and Bank of America at the top of the list. But others like Goldman Sachs have also been pushed to bring in more competent people. The new directors are much more aware of what happened in the years leading up to the financial crisis, and to take action.

Not only have boards been pushed to bring in new, more active people, political and market forces are pushing boards into a greater role in the banks themselves. The Dodd-Frank Act charges boards with an enhanced duty to monitor systemic risk at financial institutions and requires the creation of risk management committees made up of independent directors for these banks.

Corporate governance advocates, meanwhile, are pushing boards to take a more active role not only in the hiring and firing of the chief executive but in the operation of the company.

The consequence is that not only do boards have more legal responsibility to run the company, they are being exhorted to do so. Boards are listening. The change is real and amply underscored in the shakeup at Citigroup. Mr. Pandit’s resignation is remarkable because it goes beyond what had been the traditional board role, which has been to stand back and hire or fire the chief executive. Here, the board appeared to want to change the course of Citigroup’s operations against the wishes of Mr. Pandit.

The lesson of Pandit’s departure is that boards are now expanding their focus and looking to veto or change a company’s direction and operations. And that it is happening at a place like Citigroup, where for years being a director was more like being a minor royal – not much responsibility, but nice perks — is doubly remarkable.

The real question though is whether boards can run companies better than chief executives can. Boards comprise part-time members who don’t have the same interests at stake. They are also committees and thus may lack the wherewithal to properly execute. In fact, some blame the financial crisis on the failure of boards to correctly monitor financial institutions. But that is a developing story.

For now, we’re now in a new world where the boards rule and are unafraid to exert their power. Chief executives, beware.

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You’re the Boss Blog: The Big Banks Say They Are Meeting Their Lending Commitment

Searching for Capital

A broker assesses the small-business lending market.

Earlier this month, I published a post entitled, “Are the Big Banks Keeping Their Commitment to Small Businesses?” It had to do with a commitment that 13 of the largest banks in the country made last September to increase their small-business lending by $20 billion over the following three years.

Before writing that post, I spoke with executives from three of the largest banks on the list, the Small Business Administration and the Financial Services Roundtable, a trade association that represents these banks. Because I wanted to understand what exactly the banks had promised to do, I asked some basic questions:

What types of small businesses were the banks talking about? Were they truly small businesses that needed capital, or were the banks including larger businesses that have tens of millions of dollars of revenue? What type of loans were included in this commitment? Were the banks including credit card lending? Do all of the banks have the same understanding of the commitment?

The questions might seem like nitpicking, but without a clear definition of the kinds of loans and the kinds of businesses, it was hard to know whether the commitment meant much of anything at all. Furthermore, judging by what the banks have stated in their call reports to the Federal Deposit Insurance Corporation, it seemed the big banks had fallen behind in their commitment. But the Small Business Administration and the Financial Services Roundtable assured me that they would be issuing their own report card toward the end of September and that it would clearly state how the banks were doing at the one-year mark of their commitment.

In a blog post published Monday night, the S.B.A. administrator, Karen G. Mills, announced that in just one year “the 13 banks have already increased lending by more than $11 billion.” But the post offered no further information about what the terms of the commitment. Meanwhile the Financial Services Roundtable, the American Bankers Association and the Consumer Bankers Association sent out a release announcing the progress and stating, “Our members are fully committed to increasing lending to small businesses.” Their release was short and simple and similarly provided no additional detail.

According to Ms. Mills, the banks are up by $11 billion; according to the F.D.I.C. call reports, the banks have fallen behind by more than $2 billion. We are still hoping the banks will explain what exactly they have committed to do.

Ami Kassar founded MultiFunding, which is based near Philadelphia and helps small businesses find the right sources of financing for their companies.

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Economix: How Health Insurance Affects Health

In the nearly year and a half since Congress passed the health care overhaul, one of the main purposes of the bill — to provide health insurance to people who lack it — has often been lost in the debate. Instead, supporters and opponents of the bill have argued over whether the bill is constitutional, and they’ve argued over whether the bill will cut medical costs more or less than the Congressional Budget Office projects.

Those are obviously important issues. But so is the fact that, unlike any other rich country in the world, the United States has tens of millions of people who do not have health insurance and therefore go without some forms of medical care.

A new study being released today, by some of the country’s top health economists, aims to estimate the effects of not having health insurance — and the effects are large.

The researchers used a lottery that the state of Oregon conducted in 2008 to determine who would become eligible to apply for a limited number of Medicaid slots. The researchers compared the health outcomes of those who won the lottery (many of whom then received insurance) and those who did not (who were more likely to remain uninsured).

The researchers have followed the subjects for only a year so far, so the paper has some clear limitations. But it nonetheless suggests that having health insurance substantially improves health. Expanding insurance does not save society money — as some advocates of preventive medicine have claimed — but it does appear to make people mentally and physically healthier.

The authors point out that the insurance in question — Medicaid — is the same one that many uninsured people will receive as part of the health care law. For that reason, among others, the paper suggests that the law is likely to improve the health and well-being of many of the uninsured.

Katherine Baicker — one of the authors and a Harvard economist who served in President George W. Bush’s administration — wrote the following to me, via e-mail:

There has been a great deal of uncertainty about how much of a difference Medicaid makes to enrollees. Some argued that Medicaid isn’t ‘good’ insurance coverage and that a Medicaid card doesn’t get enrollees much access to care. Others argued that the uninsured already have access to care through the emergency room, clinics, or charity care.

Our study shows that gaining access to Medicaid matters on a number of different dimensions, including increased access to and use of health care.

The authors also point out that the benefits of health insurance aren’t only medical. They’re financial too, as is the case with other forms of insurance. Here’s another author, Amy Finkelstein (an M.I.T. economist who has written for The Wall Street Journal opinion pages and whom I’ve written about), also via e-mail:

Health insurance isn’t just about access to health care – it’s also about protection from financial ruin. This point isn’t often discussed in the debate about health insurance expansions, but the reduction in financial strain that we found was substantial. This is important for enrollees, but it is also important for the providers who see fewer of their bills go unpaid.

Besides Ms. Baicker and Ms. Finkelstein, the paper’s authors include Jonathan Gruber (an M.I.T. economist, who has advised the Obama administration) and Joseph Newhouse (a Harvard economist who designed and ran the famous RAND Health Insurance Experiment in the 1970s and ’80s). The other authors are Sarah Taubman, Bill Wright, Mira Bernstein, Heidi Allen and members of the Oregon Health Study Group.

Excerpts from the study follow:

About one year after enrollment, we find that those selected by the lottery have substantial and statistically significantly higher health care utilization, lower out-of-pocket medical expenditures and medical debt, and better self-reported health than the control group that was not given the opportunity to apply for Medicaid.

The increase in hospital admissions appears to be disproportionately concentrated in the approximately 35 percent of admissions that do not originate in the emergency room, suggesting that these admissions may be more price sensitive.

[W]e find that insurance is associated with improvements across the board in our measures of self-reported physical and mental health, averaging two-tenths of a standard deviation improvement. These results appear to reflect improvements in mental health and also at least partly a general sense of improved well being; they may also reflect improvements in objective, physical health, but this is more difficult to determine with the data we now have available.

[I]nsurance is also associated with an increase in compliance with recommended preventive care. We look at four different measures of preventive care: blood cholesterol checks, blood tests for diabetes, mammograms, and pap tests. …[T]he results indicate … a 20 percent increase in the probability of ever having one’s blood cholesterol checked, a 15 percent increase in the probability of ever having one’s blood tested for high blood sugar or diabetes, a 60 percent increase in the probability of having a mammogram within the last year (for women 40 and over), and a 45 percent change in the probability of having a pap test within the last year (for women).

[Our] calculation suggests that insurance is associated with a $778 (standard error = $371) increase in annual spending, or about a 25 percent increase relative to the implied control mean annual spending.

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