Upset over negative publicity in Salomon Smith Barney’s and parent Citigroup’s role in financing Enron and WorldCom, CEO Sandy Weill informed brokers and other employees in an internal memo that the firm has decided to "change the way" it does business.
Weill said that the firm would not provide financing to companies that conceal debts.
"Quite simply, if a company does not agree to record a material financing as debt on its balance sheet, Citigroup will only execute the transaction if the company agrees to publicly disclose its impact to investors. Starting immediately, we will only do these transactions for clients that agree to make prompt disclosure," he said in the memo.
"The industry's practices need to change rapidly and we want to be a leader in defining these new higher standards," Weill wrote.
Weill previously maintained that the firm was not responsible for Enron's attempts to hide its debts because the defunct energy company did not tell its bankers that it planned to hide obligations. Yet Weill said the firm will nevertheless "separate research from investment banking" and that the firm "must do everything we can to identify, eliminate or manage conflicts of interest, real or perceived."
He also called on regulators "to pass rules that would preclude analysts from going on investment banking pitches and road shows." He noted that Citigroup is "the first firm to voluntarily adopt the SEC's proposal for analysts to certify that the views expressed in their research accurately reflect their personal views and that they have not been compensated, directly or indirectly, for expressing a specific recommendation. The sooner these reforms are adopted as industry-wide rules, the better."
Broker reaction to Weill’s memo was positive.
"I think it takes a lot of guts to come right out publicly and make such hard-hitting statements," says one producer. "I don’t believe this is strictly a PR move. Look, he already signed and announced an agreement about certifying the accuracy of the firm’s financial reports. That says a lot to me. That says he’s just not saying he’s going to do something, he’s doing it."
Weill revealed in the memo that both he and CFO Todd Thomson signed an oath certifying the accuracy of the disclosure in the firm’s financial reports.
"It is only right that CEOs and the company's most senior financial officer stand behind their companies' financial disclosures," Weill said.
The firm will also begin recording stock options granted to employees as expenses.
"Investors have made it clear that they want options accounted for in this manner," Weill said in the memo.
One broker says Weill’s memo is a logical response to the pressures confronting the firm.
"At this juncture, you have to come out and change the way you’re doing business," a rep says. "This is the worst situation the firms have been in ever. The investigations, the scandals, the lawsuits, the senate hearings. I mean, no one wants to come near this place. It’s like there’s a big fat ‘X’ on the front door with a line going through it. No one wants to hear about Smith Barney, Merrill Lynch, Morgan Stanley, Paine Webber. It’s like a four-letter word.
"But [Weill] did the right thing–maybe a little later than he should have–but at least he did it. This is what clients want to hear. They want to hear that the company is changing the way it does business. They want to hear that we won’t do business with a company that doesn’t disclose everything financially. He said what everyone wanted to hear, but now it’s a matter of following through on everything."
Says another Smith Barney rep: "I applaud Sandy for what he did, for what he said. He’s showing Wall Street he means business. He’s showing the clients that he’s willing to change to turn things around. He made some pretty bold statements. Now, he has to stand by them otherwise he’ll expose himself. He’s got to come through and straighten our the firm’s reputation."
Here is Weill’s complete e-mail:
To: All Employees
From: Sandy Weill
Date: August 7, 2002
Re: Progress Report
In my last letter to you, I told you we were reviewing and would continue to review our business practices to ensure they adhere to the new standards that are emerging and that we continue to be a leader in defining and adopting higher standards. As I described, recent events have pointed out two key lessons: we must do everything we can to identify, eliminate or manage conflicts of interest - real or perceived - as they arise, and we need constantly to strengthen transparency through meaningful disclosure. As the financial services industry gets increasingly complex, we need to reemphasize these basic values. As you know, we are changing the way we do research and taking the lead to build stronger walls to separate research from investment banking. By being the first firm to voluntarily embrace the Spitzer principles, we have precluded investment bankers from having any say in analyst compensation and previewing reports. We also called on regulators to pass rules that would preclude analysts from going on investment banking pitches and road shows. And we were the first firm to voluntarily adopt the SEC's proposal for analysts to certify that the views expressed in their research accurately reflect their personal views and that they have not been compensated, directly or indirectly, for expressing a specific recommendation. The sooner these reforms are adopted as industry-wide rules, the better. Also, I cannot over-emphasize the importance we place on our senior management's "blood oath" commitment to hold _ of any stock or options we receive for as long as we're running the company. This is the toughest Stock Ownership Commitment in the corporate world today. Because we are committed to the long-run health of our company, we are constantly looking for ways to run the company better. With that in mind, today, I wanted to discuss with you four important new developments. Affirming our SEC Filings Today, our CFO Todd Thomson and I (5) signed an oath certifying the accuracy of the disclosure in our financial reports. It is only right that CEOs and the company's most senior financial officer stand behind their companies' financial disclosures and therefore we welcomed the opportunity to demonstrate our confidence in the integrity of the disclosures we provide. Expensing Options Beginning in January, we will account for all stock options for management, employees and members of our Board as an expense. Investors have made clear that they want options accounted for in this manner, and we at Citigroup continue to place a high priority on our responsibilities to our shareholders. For 2003, we estimate the impact of this decision will be approximately $.03 per share and when fully phased in over the next five years, we estimate the impact will be approximately $.06 per share. New Board Committee on Governance Our Board has decided that we should create a new Board level committee to focus on corporate governance. All of the members of the new committee will be independent directors. As you may know, today, both the Personnel, Compensation and Directors Committee and the Audit Committee of the Board are 100% comprised of independent directors. This new committee strengthens our commitment to the highest standards of corporate governance. New Initiatives in our Structured Finance Business While it is the responsibility of each and every corporation to ensure that its financial statements fairly represent its true financial condition and of its auditors to provide an independent verification of the financial statements, unfortunately, recent events suggest that these safeguards have not always worked as they should. The industry's practices need to change rapidly and we want to be a leader in defining these new higher standards. We support the various legislative and regulatory initiatives designed to increase transparency. At Citigroup, we are committed to greater transparency in the disclosure of structured finance transactions and we are answering the call from Washington and from investors by adopting strong initiatives ourselves. Quite simply, if a company does not agree to record a material financing as debt on its balance sheet, Citigroup will only execute the transaction if the company agrees to publicly disclose its impact to investors. Starting immediately, we will only do these transactions for clients that agree to make prompt disclosure of the details of the transaction including management's analysis of the net effect the transaction has on the financial condition of the company, the nature and amount of the obligations, and a description of events that may cause an obligation to arise, increase or become accelerated. In addition, we will only do these transactions for clients that agree to provide the complete set of transaction documents to their chief financial officer, chief legal officer and independent auditors. We believe our new policy will encourage companies to provide greater transparency than currently required by law and help restore investor confidence in our financial markets. For Citigroup itself, our second quarter 10 Q already goes beyond legal and regulatory requirements in providing enhanced disclosure of Citigroup's securitization activities. Going forward, we will, of course, follow the same practices we are asking our clients to follow. Citigroup has always strived to be at the forefront of progressive industry change. I believe that the actions we are taking in these four key areas underscore our commitment to transparency, accountability and full disclosure to the investment community. We continue to review practices and policies and take action to make changes where appropriate. And of course, I will continue to keep you informed. I continue to deeply believe in the future of our company and, on behalf of management and the Board of Directors, let me reiterate how proud we are of your integrity, commitment and high performance. Thank you for your ongoing support.