Restoring Ethics and Image Before Growth

1. Restoring Ethics and Image Before Growth

2. Citigroup.com David Lee & Julie Ratliff Introduction About Citigroup Scandals Prince’s Plan Reactions Questions • Introduction • About Citigroup • Key Executives • Scandals and Litigation • The Prince Plan For Change • Discussion Session

3. Citigroup.com David Lee & Julie Ratliff Introduction About Citigroup Scandals Prince’s Plan Reactions Questions About Citigroup • Citigroup is the first financial services company in the U.S. to bring together banking, insurance, and investments under one umbrella. • 141,000 full-time, 7,000 part-time employees in the U.S. • 146,000 full-time employees in more than 100 countries outside U.S. • Citigroup has a 200 year old legacy of innovation and achievement.

4. Citigroup.com David Lee & Julie Ratliff Introduction About Citigroup Scandals Prince’s Plan Reactions Questions About Citigroup Corporate & Investment Banking Global Wealth Management Global Consumer

5. Citigroup.com David Lee & Julie Ratliff Introduction About Citigroup Scandals Prince’s Plan Reactions Questions About Citigroup • Sandy Weill • “Everything about Weill is big, including his ambition” • Charles Gasparino, “Blood On The Street” • In the 1960’s grew Shearson Loeb Rhodes brokerage into an empire that he sold to American Express in 1981

6. Citigroup.com David Lee & Julie Ratliff Introduction About Citigroup Scandals Prince’s Plan Reactions Questions About Citigroup • Sandy Weill • Left Amex to start The Traveler’s Group • Merged Traveler’s Group, Salomon Smith Barney, and Citicorp banking empire for 83 billion dollars. • Became one of Wall Street’s wealthiest and most influential men. Helped break the Glass-Steagall Act established by Congress in 1933 • By 2002, Weill was in the middle of allegations that Citigroup had helped Enron and Worldcom conceal debts.

7. Citigroup.com David Lee & Julie Ratliff Introduction About Citigroup Scandals Prince’s Plan Reactions Questions About Citigroup • Sandy Weill • Still defends what he built, saying, “I’m sure there • would have been things that would have been tweaked • this way or that way, but when you look at the results of • what happened, you have to say it was a great success.” • (New York Times, September 11th 2005) • His advice for successor Chuck Prince? “Don’t screw it (legacy) up.”

8. Citigroup.com David Lee & Julie Ratliff Introduction About Citigroup Scandals Prince’s Plan Reactions Questions About Citigroup • Charles “Chuck” Prince • Became CEO of Citigroup in October of 2003. • With the company for 24 years. • Began his career in 1975 as an attorney with U.S. Steel/ • In 1979 he joined Commercial Credit Company, which Sandy Weill took over in 1986.

9. Citigroup.com David Lee & Julie Ratliff Introduction About Citigroup Scandals Prince’s Plan Reactions Questions About Citigroup • Charles “Chuck” Prince • From that point worked as chief counsel and was known • to be incredibly loyal to Weill. • Appointed as CEO in 2003 to be fireman, cleaning up scandals and improprieties since the late 1990s. • Has been characterized as smart, logical, and big in capacity to laugh and work. A long time analyst notes, “I believe noncharismatic Prince is going to be a more positive force at Citigroup than the other three charismatic CEOs going back to the 1960s.”

10. Citigroup.com David Lee & Julie Ratliff Introduction About Citigroup Scandals Prince’s Plan Reactions Questions Spitzer Investigation • Investigation begins in 2001 • Sell Side analysts advocating investment banking clients • Citigroup settles in 2003 • $1.5 billion private litigation reserve • Major reforms required Sandy Weill Eliot Spitzer

11. Citigroup.com David Lee & Julie Ratliff Introduction About Citigroup Scandals Prince’s Plan Reactions Questions NASD Spitzer Investigation • Jack Grubman – Citigroup telecom analyst • WinStar is a $24mm I/B client • $50 price target, “Buy” rating • Tells a major investor, “sell in the low $20’s” • Maintained “Buy” rating until bankruptcy

12. Citigroup.com David Lee & Julie Ratliff Introduction About Citigroup Scandals Prince’s Plan Reactions Questions NASD Spitzer Investigation FTC • Citigroup acquires Associates First Capital subprime lenders in 2000 • Deceptive inducement into high rates and fees • Tricking borrower into high cost credit insurance • FTC states, “Systematic and widespread deceptive and abusing loan practices” • $215mm consumer protection settlement

13. Citigroup.com David Lee & Julie Ratliff Introduction About Citigroup Scandals Prince’s Plan Reactions Questions ENRON NASD Spitzer Investigation FTC • Citigroup designed SPE’s for ENRON • SPE’s hid debt and created operating cash flow • Enron declares bankruptcy in 2001 • Citigroup settles with the SEC for $120mm

14. Citigroup.com David Lee & Julie Ratliff Introduction About Citigroup Scandals Prince’s Plan Reactions Questions ENRON NASD Spitzer Investigation FTC WorldCom • Jack Grubman spins Bernie Ebbers for $100mm I/B fees • WorldCom not downgraded to “neutral” until WorldCom shares fell 90% • Grubman warns WorldCom execs • Over $70 billion in restatements • Citigroup settles class action for $2.7 billion

15. Citigroup.com David Lee & Julie Ratliff Introduction About Citigroup Scandals Prince’s Plan Reactions Questions ENRON Japanese FSA NASD Spitzer Investigation FTC WorldCom • Citigroup is the largest and oldest foreign bank in Japan • Loans used for money laundering and public stock manipulation • Japan’s FSA closes Citigroup’s private banking practice

16. Citigroup.com David Lee & Julie Ratliff Introduction About Citigroup Scandals Prince’s Plan Reactions Questions • Dropped coverage of 117 companies • 30% market value lost in 2002 • Legal reserve • Fed halts M&A activity

17. Citigroup.com David Lee & Julie Ratliff Introduction About Citigroup Scandals Prince’s Plan Reactions Questions Chuck Prince’s Plan • “Citigroup will become the most respected global financial services company” • September, 2004: Prince hired Sally Krawcheck as • CFO and head of Strategy. Ms. Krawcheck was • known at Smith Barney as ‘The Queen of Clean’ • February 16, 2005: Prince announced his Five Point Ethics Plan in a group memo to his employees. The four page ethical document listed a series of initiatives that will be implemented starting March 1, 2005. • The Program was kicked off with a company-wide broadcast of “The Company we want to be.” to inspire an appreciation for the Citigroup legacy.

18. Citigroup.com David Lee & Julie Ratliff Introduction About Citigroup Scandals Prince’s Plan Reactions Questions Chuck Prince’s Plan • The Five Point Ethics Plan • Expanded Training – Annual training about history and nature of franchise for all levels of management. Annual training for all employees on Ethics and Code of Conduct. • Enhanced Focus on Talent and Development – New initiative on flexibility, manager surveys, and business leadership seminar for senior managers. • III. Balanced Performance Appraisals & Compensation – Consistent performance appraisals and evaluations of all managers. Compensation now based on how all Citigroup performs, not just how individual manager performs. Bonuses given on the basis of ethics program participation.

19. Citigroup.com David Lee & Julie Ratliff Introduction About Citigroup Scandals Prince’s Plan Reactions Questions Chuck Prince’s Plan • The Five Point Ethics Plan (Cont’d) • Improved Communications – Prince himself has been traveling around to visit many managers and employees. Working to improve communication of values and goals. Will analyze results of issues to new Ethics Hotline, and there will be more meetings and conferences for Senior Managers. • V.Strengthened Controls – Compliance Training, risk control self assessments, and creation of the Independent Global Compliance function that will be responsible for ensuring compliance with rules and regulations.

20. Citigroup.com David Lee & Julie Ratliff Introduction About Citigroup Scandals Prince’s Plan Reactions Questions Chuck Prince’s Plan • Lawyer Lewis B. Kaden joins Citigroup • September 26th, 2005 Lewis B. Kaden joined Citigroup as Vice Chairman and Chief Administrative Officer. • Kaden served as moderator for PBS’s “Ethics in America” series which won a Peabody award. • Prince said of Kaden, “Lew’s deep experience, insight, and integrity will be of great value as we pursue our ambitious agenda to build the most respected global financial services company.”

21. Citigroup.com David Lee & Julie Ratliff Introduction About Citigroup Scandals Prince’s Plan Reactions Questions Reactions to the Plan • Ethics Expert • Professor Charles Elson, director of the Weinburg Center for Corporate • Governance at the University of Delaware, had the following comments: • “If the plan can clarify blurry issues and help instill a culture of compliance to a code, I applaud it. But to teach ethics to make people ethical, that’s a bit strained. The acid test is going to be a no-tolerance policy for ethical violations, not just legal violations.” • Prince’s efforts were a good start, but he would need to distance himself from former administration (Sandy Weill) that did not put compliance first.

22. Citigroup.com David Lee & Julie Ratliff Introduction About Citigroup Scandals Prince’s Plan Reactions Questions Reactions to the Plan • Departure of Weill’s Army? • July, 2005 – Robert B. Willumstad, Citigroup’s President, Chief Operating Officer, and member of Board of Directors announced his departure • July 2005 – Sandy Weill stated that he wanted to end his contract early to launch a private equity fund. Request denied due to conflict of interest. • August 2005 – Marjorie Magner, chairman and chief executive of the Global Consumer Group segment of Citigroup announced her departure.

23. Citigroup.com David Lee & Julie Ratliff Introduction About Citigroup Scandals Prince’s Plan Reactions Questions Reactions to the Plan • Saudi Prince Alwaleed bin Talel • Citigroup’s biggest investor. • Said Prince needs more time to prove himself. “You have to give him time to institute his culture and way of thinking. I’m backing them all the way.” • Media & Analysts • The company is just too big to mandate an ethics program. Why should stakeholders wait?

24. Citigroup.com David Lee & Julie Ratliff Introduction About Citigroup Scandals Prince’s Plan Reactions Questions Reactions to the Plan • Prince’s Response • “The real question is, can we execute it in a way that becomes more embedded?” • “If we delegate this to the [human-resources] department, it’s not going to work.”

25. Citigroup.com David Lee & Julie Ratliff Introduction About Citigroup Scandals Prince’s Plan Reactions Questions Questions • Is Prince’s plan sufficient given the magnitude of the problems facing Citigroup? • Has Citigroup grown too large to enforce corporate governance or internal controls? What effect has the organization’s size and complexity had on the continued problems? • How can Citigroup communicate the reformed organizational culture to the employees and the public? • 4) Do you believe it is possible to enforce an ethics program with this or any other organization?

26. Citigroup.com David Lee & Julie Ratliff Introduction About Citigroup Scandals Prince’s Plan Reactions Questions Questions 5) As Charles Prince, what would be your method to communicate the plan to Citigroup employees and inspire change? 6) Is Prince’s plan sufficient given the magnitude of the problems facing Citigroup? 7) Who are the critical stakeholders? How should Prince handle the stakeholders’ responses and concerns? 8) What effect will the new plans have on Citigroup’s investors? What can Citigroup do to mitigate negative responses?