Soon after Vikram Pandit was named Citigroup’s new CEO on December 11 — succeeding Charles (“Chuck”) Prince — the stock price dropped 4.5% to around $33. The banking behemoth faces several challenges, but Pandit’s top priorities should be to restore confidence that Citigroup can pull off its financial services supermarket vision and to provide resources to growth areas, according to Wharton faculty members who spoke with India Knowledge at Wharton.
Born in the western Indian town of Nagpur and raised in Mumbai, Pandit, 50, built a career on Wall Street after securing his doctorate in finance and master’s degree in electrical engineering from Columbia University. He spent 20 years with Morgan Stanley, rising to the top of its institutional securities group before setting up Old Lane Partners, a hedge fund he sold earlier this year for $800 million to Citigroup. Pandit joined Citigroup in April to head the bank’s markets and banking units.
Pandit’s long-range challenges translate into several near-term challenges. These include emerging from the ongoing sub-prime mortgage mess without further damage, according to Wharton faculty. In addition, Pandit should focus on aligning “structure” to “strategy,” which essentially means recognizing that some acquisitions were ill-advised and re-engineering the organization, they add.
Citigroup’s sub-prime exposure has sucked out $6.4 billion in write-offs in the latest quarter. Just before Prince stepped down as CEO, he feared another hit of $8 billion-$11 billion was around the corner. The company’s net income for this year’s third quarter fell 60% over the year-ago quarter to $2.2 billion on revenues of $22.4 billion.
“The biggest challenge is also an opportunity,” says Harbir Singh, professor and acting chair of Wharton’s management department. “He has to take what is a great organization to its next set of opportunities.” He says Citigroup has “a lot of strong businesses, a lot of talent, and a very strong brand name and reputation that in the short run has had difficulties.” According to Singh, Pandit’s primary task is to “reestablish confidence within the company and outside. The idea is to move the company forward from its current set of difficulties.” He adds that Citigroup has enough talent but Pandit will have to think long-term and get past the shorter-term crises which have been holding the company back.
Stock markets don’t seem to endorse the mandate Pandit has won from his board, though. Market analysts have attributed the drop in the company’s share price to a combination of Citigroup not hiring an outsider for its top job, and Pandit’s lack of experience in growth areas such as retail consumer banking. Singh says research studies have shown that “when a company is in trouble, getting an outside CEO generally gets a positive shareholder reaction.” Singh finds the market’s reaction surprising because “it has been well known that Pandit has been part of the organization for several months, and he has been performing well.” Pandit is not easily classified as an outsider or an insider, Singh notes. “For a CEO-level position you could possibly say he’s an outsider, and yet you could say he’s an insider in the sense that he knows the company and various people have had a chance to work with him.”
Wharton management professor Peter Cappelli agrees with that assessment. “It is a good thing for somebody who knows the organization and understands how it works and knows the best way to make improvements,” he says. Yet “when something is wrong with a company, the outside [investing] community would like to see an outsider take over, to shake it up.”
Pandit said after being named CEO that he would conduct an “objective and dispassionate” review of all of Citigroup’s businesses. That should mean revisiting the new realities facing each of the numerous acquisitions Citigroup made in the regimes of Prince and his predecessor Sanford Weill.
Weill and Prince built the company aggressively, picking up banks, credit card companies, pension funds and hedge funds across the world. Their most significant deal was the $70 billion merger with Travelers Insurance in 1998. That business was eventually sold off in parts, and the chapter finally ended in February this year. “Hiving off Travelers is an implicit admission of the limitation of the original strategy Sandy Weill put together,” says Jitendra Singh, a Wharton management professor who is currently dean of the Nanyang Business School in Singapore.
Jitendra Singh sees kinks in Citigroup’s efforts through its merger spree to build itself as “a highly diversified firm covering more or less the whole waterfront in financial services.” He says that “the jury is still out” on how successful this strategy has been. “There are other banks that are trying a similar strategy, like UBS and Deutsche Bank and also some Asian banks. It is not clear if anyone has succeeded with this strategy.”
“The promise was that the strategy would lead to cross selling — utilizing the strengths of one area to enhance the position in another,” says Harbir Singh. “That may well be an assumption that needs to be reexamined. Enough time has gone by to implement the integrated bank concept; it is time now to look at where have we been successful and where have they been unsuccessful.” Pandit, he adds, also has to figure out why Citigroup was unsuccessful in some areas. “Was that because of flawed implementation efforts or was it because fundamentally these businesses do not interact?”
The deeper question for Pandit, says Jitendra Singh, relates to the restructuring of Citigroup’s various business portfolios — “which ones belong and which ones do not belong.” He says Pandit will need to identify “where the value is being created” [in a specific business unit] by being a part of Citigroup. He says that could include opportunities in internal labor and talent pools, or specific areas of expertise that can be transferred across divisions. That exercise will point Pandit to decisions on which of Citigroup’s parts need to be divested, and those that could benefit from better integration. Jitendra Singh advises Pandit not to rush into this. “I would not want to do this right away, if I were him. I would want to do this slowly, cautiously and very deliberately.”
For now, Pandit will have all eyes on him as he works to contain the fallout of the sub-prime mess, but he also needs to understand the factors underlying the problem, says Jitendra Singh. “This is a failure of risk management and oversight,” he says. “How did they get to this in the first place? That is something he has to find out.” He says the examples of how Goldman Sachs and other Wall Street firms have avoided getting hurt by the sub-prime crisis show “clearly that it can be done.”
The No. 1 Challenge
Harbir Singh believes that the sub-prime mess and related issues are important, “but they are not central,” he says. “The number one challenge is to rebuild the credibility of the group. It was a very prestigious organization — which in many ways it still is — but it has been tarnished by its exposure to sub-prime mortgages and also some of the [top management] infighting that was evident some years ago.” Pandit needs “to rebuild a sense of an organization on the move that is capitalizing on its scale, scope and reputation and not getting held back by its own problems,” he adds.
Aligning strategy with structure is central to whatever Pandit does, says Harbir Singh. “The question is, was Citigroup strong in aligning strategy with structure or did the structure get in the way because of the sheer scale and specialization of individual roles?” Getting a new CEO is not enough for Citigroup to right its ship. “In general terms, and not just at Citigroup, you cannot just change one variable,” he says. “If you have to implement change, you have to change an array of variables collectively, so that they all move in concert.”
Harbir Singh lists some of the top areas that warrant Pandit’s attention. “As he faces the challenge of structure, he has to also think about a few other things like incentives for his people, information systems, performance measurement and strategy in addition to structure and culture,” he says. “They all have to pull in the same direction.” Prince has also left to Pandit the task of implementing an organization-wide restructuring he initiated in April. The 327,000-strong organization with more than 8,100 branches globally then said it would eliminate 17,000 jobs, or about 5% of its workforce, with a clear eye on cheering its stock price.
“The stock was languishing,” says Jitendra Singh. (Citi’s current stock price of $31 is about half of what it was seven years ago.) But he warns against reading too much into the restructuring exercise. “This is one of those things that Wall Street banks and investment banks typically go through,” he says. “There are examples where restructuring does create value but we must not ignore the symbolic value of restructuring.” Wall Street, however, may be willing to give Pandit a little more elbow room than Prince enjoyed. “I would stick my neck out and say that if Vikram Pandit wants to do tough things, he can have the world accept them much more than they would from his predecessor.”
Pandit also has a time advantage, says Harbir Singh. “What we know from a lot of research in change management is that the biggest appetite for change is in the early stages. Right now, there is an appetite for change, but that window will not last forever. He has to take advantage of that window in the first six months and implement the most significant changes he wants to make. It is likely that they will be met with less resistance than if he takes a long time to identify what changes need to be made.”
Jitendra Singh believes that during this “honeymoon period” of six to nine months, Pandit could quietly put together a team of trusted people to see where the really big problems are.” He says “this doesn’t need to be very public,” but that Pandit needs to get clarity on what went wrong, including the reviewing processes that led to the risk management and oversight issues. Cappelli is not sure if Pandit will get the desired latitude from investors. “He probably has less of a window than probably an outsider would have in making changes,” he says. “In some ways it’s a little more difficult for an insider to make the changes, although you may know what you should do.”
For now, Pandit has the strong support of Robert Rubin, Bill Clinton’s Treasury secretary, who is chairman of Citigroup’s executive committee. He also must have the tacit support of key Citigroup investor Saudi prince Alwaleed, who publicly expressed his disappointment with Prince, although in November, he injected $7.5 billion in Citigroup’s equity as a measure of support.
Cappelli believes the opportunity Pandit has may be overstated, and so is the scope of all that he can target by recalibrating the organization. “His biggest concerns are the short-term issues of cleaning up the finances of the bank right now,” he says. “I don’t think he’s going to have a chance to redirect the company and make strategic decisions for a while. He probably does not have the mandate to truly direct strategy yet. My guess is over the next year he will be focused on internal restructuring issues.”
As Pandit rearranges the pieces on his chess board, he will need to bring on board those who were contenders for his job, according to Jitendra Singh. “He has to make sure, if these people are important to the future of Citigroup, that they do not get up and leave. He has to create an equation with these people and get them on board as collaborators.”
Cappelli thinks that is a long shot. “My guess is they won’t stay,” he says. “There is so little institutional loyalty to organizations that people who lose out on jobs that they think they should have had just tend to leave.” Cappelli would hardly be surprised if some of those who were in the running for Pandit’s job were to leave in six months or less. “It’s not like they need the money. They may decide to go spend more time with their families,” he adds.