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AFSCME Urges Two Citi Directors to Step DownSubmitted by: Ted Allen, Publications

The American Federation of State, County, and Municipal Employees (AFSCME) is calling for the resignation of two Citigroup directors who apparently were reelected with the help of broker votes.

In a 10-Q filing on May 11, the company reported that director C. Michael Armstrong received 2.652 billion ?for? votes and 1.116 billion ?against? votes (or 29.6 percent opposition) at the company?s April 21 annual meeting, while director John M. Deutch received 2.763 billion ?for? votes and 1.083 billion ?against? votes (28.2 percent dissent).

However, the labor union calculates that Armstrong and Deutch would have received only 920 million and 1.031 billion votes, respectively, if the 1.732 billion uninstructed ?broker? votes had been excluded from their tallies. On this basis, AFSCME estimates that Armstrong actually received 54.8 percent opposition while Deutch had 51.2 percent dissent. Citigroup, which has a majority threshold voting standard in its bylaws, has reported that all 14 management nominees were elected.

?We will be calling for the resignation of Armstrong and Deutch based on the repudiation by active shareholders,? Richard Ferlauto, AFSCME?s director of corporate governance, told RiskMetrics.

In response, Shelley J. Dropkin, Citigroup?s general counsel for corporate governance, noted that ?all of our directors received a significant majority of votes cast.? ?It would undermine the principle of majority rule for a director who receives 70 percent of the vote to resign because 30 percent voted against him,? she told RiskMetrics.

Armstrong and Deutch are among six current and former members of Citi?s audit committee who were targeted by an AFSCME ?vote no? campaign. The union fund complained that the audit panel members ?missed key warning signs? and failed to ?understand the risks the company faced as its exposure to subprime mortgages and derivatives increased beyond prudent levels.? The Florida State Board of Administration, Trillium Asset Management, and Domini Social Funds were among the institutional investors who opposed Armstrong and Deutch, according to ProxyDemocracy.org.

The vote at New York-based Citigroup also is notable because there were significantly more broker votes this year. The 1.732 billion uninstructed votes accounted for about 43 percent of the 4 billion votes cast this year. At the 2008 meeting, there were 1.051 billion broker votes at Citigroup, or 23.7 percent of the total cast. From 2004 to 2007, the broker vote percentages ranged from 19 percent to 19.75 percent, according to the company?s filings. It?s unclear what might have caused this year?s spike in broker votes; this increase may be explained by the investors who shorted their Citi shares (and thus couldn?t vote them) in advance of the conversion of preferred stock held by the U.S. government and foreign sovereign funds.

Full post as published by Institutional Shareholder Services -- Corporate Governance Blog on May 13, 2009 (boomark / email).