1. Citigroup is the world’s largest financial services company. Its history dates back to 1812. Now, it does business in more than 100 countries. In many countries, Citigroup has been active for more than 100 years. Citigroup 2005 annual report proudly claimed that it had “the best international footprint of any US financial services company and the best US presence of any international financial services company.” Yet, recently, Citigroup found itself engulfed in a number of ethical crises around the world. Most alarming, these new crises erupted after it was criticized for its failure to have a “firewall” separating analysts and investment bankers for its involvement in the Enron bankruptcy in the US in the early 2000s.
In London, on the morning of August 2, 2004, Citigroup’s bond trading unit dumped $13.3 billion worth of European government bonds onto the market. Such a huge volume caused immediate chaos in the market and resulted in lower prices. Then, within about a half hour, Citigroup’s bond traders bought back a third of the bonds they just sold for $24 million profit. The traders were jubilant. Their actions were legal, but they broke an unwritten norm of the industry not to stimulate major turbulence of the thin summer trading. When a puzzled rival trader called to ask what was up, the Citigroup crew laughed and hung up. Nobody was laughing now. The profits were not worth the damage to its reputation. Citigroup angered governments in counties such as Belgium and Italy that relied on the international bond market and offered Citigroup lucrative contracts to handle their deals. Overall, European regulators would no longer tolerate such behavior.
In Japan, a worse disaster struck. In September, 2004, regulators ordered Citigroup to shut down its private bank in Japan because of a series of abuses in selling securities at “unfair” prices to clients. Citigroup sales force pushed sales to many Japanese clients without explaining the underlying risk. Regulators charged the bank with fostering “a management environment in which profits were given undue importance by the bank headquarters.” This drastic action followed repeated warnings in previous years. While Citigroup was still allowed to run a retail bank and a corporate bank in Japan, the damage to its reputation was significant.
The ramifications were profound. On the first page of the 2004 annual report, Chuck Prince, Citigroup’s CEO, apologized to shareholders. Around the world, Prince met with employees and stressed the importance of ethical integrity. Prince, a lawyer by training, had assumed his position to deal with the legal and ethical turbulence in the US. Now, he had his hands full around the world. In response to the European and Japanese scandals, a new code of conduct was implemented and a Global Compliance unit was established. Every employee would receive ethics training, and a toll-free ethics hotline was aggressively marketed to employees. Prince wrote in his letter to the shareholders in the 2004 annual report:
These failures [in Europe and Japan] do not reflect the kind of company we are or want to be…We are already the most profitable and the largest financial institution in the world. We believe that when we add “most respected” to that resume, there is no limit to what we will accomplish.
Talk is cheap, according to critics. Many critics are suspicious of whether the transformation pushed by Prince will be successful. It is not an accident that Citigroup has become a global industry leader in sales and profits. The competitive instinct permeates the corporate DNA. Job number one for Prince–and indeed for the entire organization–is how to become an ethical firm without losing its competitive edge. [Note: In 2007, Prince resigned.]
Answer the following questions
- Describe the costs and benefits of breaking the norms of the global marketplace.
- Explain Citigroup’s strategy and do you feel it was successful?
- Are some of Citigroup’s employees “bad apples” or is Citigroup a “bad barrel?”
- Do you think Prince’s strategy was just a Band-aid or will its influence last?
- What would you recommend to Citigroup to retain its reputation?
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