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Investors Question CEOs' Close Ties

Nov 25, 2002 | USA Today Investors who bought AT&T stock in late 1999 on the advice of Citigroup's Salomon Smith Barney brokerage can't help but wonder if they were hurt by a close relationship between two companies' boards of directors especially the CEOs.

Regulators are now looking into what role, if any, Citigroup CEO Sandy Weill played in the bank's relationship with AT&T, including research on it by analyst Jack Grubman.

The companies are much more tied than it might appear, because Weill and AT&T's former CEO, C. Michael Armstrong, sat on each other's boards of directors.

Three years ago such a relationship would have barely made an eyebrow twitch on Wall Street. But Citigroup and AT&T formed the type of cozy corporate relationship now at the center of a maelstrom of criticism following a string of scandals that took place under the supposedly watchful eyes of boards of directors.

Shareholder-rights activists say the scandals underscore how essential it is for corporate boards to be free of any sort of conflict. One that worries them most: the potential for quid pro quo deals when CEOs serve on each other's boards.

Not all such CEO interlocks are necessarily nefarious, but Allie Monaco, a project manager at the Investor Responsibility Research Center, says they at least raise questions. ''Investors can't automatically say there's a conflict . . . but it highlights that there might be something going on,'' she says.

Citigroup and AT&T deny that their CEO interlock has caused any problems. But the questions about them go back to late 1998 and early 1999, when Weill has admitted urging Salomon star analyst Grubman, who had a negative rating on AT&T, to ''take a fresh look'' at the phone company. Grubman ultimately upgraded his rating to a strong buy.

Investigators are looking into whether Weill's suggestion was an attempt to curry favor from Armstrong. At the time, Weill was in a power struggle at Citigroup and needed the support of board members, including Armstrong.

Weill has issued a statement flatly denying any wrongdoing. ''I would never attempt to manipulate a board member's vote. Mr. Armstrong has categorically denied that his board vote was in any way connected to the upgrade,'' Weill wrote.

Meanwhile, Weill plans to leave AT&T's board soon. Armstrong is still on Citigroup's board, but just stepped down as CEO at AT&T after leading it through a restructuring.

Weill said he made his comment on AT&T ''in light of the dramatic transformation of the company and the industry. But I always believed that Mr. Grubman would conduct his own research and reach independent conclusions that were entirely his own.''

In fact, it wasn't until the end of November 1999 that Grubman changed his rating on AT&T to a strong buy. Still, anyone who bought based on that rating change and sold when Grubman downgraded the stock (but only to a buy) would have lost half of their money. During that period, the Dow Jones industrials fell 3%.

Meanwhile, Citigroup in 2000 donated $1 million to the 92nd Street Y, which operates a highly selective nursery school in Manhattan. Grubman allegedly wrote an e-mail saying he upgraded his rating on AT&T after Weill said he would use Citigroup's influence to help get Grubman's children into the school. Weill also denied that: ''This too is utter nonsense. I tried to help Mr. Grubman because he was an important employee who had asked for my help. It is therefore deeply upsetting that my intentions were so grossly distorted in this e-mail.''

Lawrence White, professor at New York University, says that just because CEOs sit on each other's boards doesn't mean they're up to no good. But such links still make investors pause and say, ''In this situation, gee, things do sound bad,'' he says.

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