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This Little Piggy Went to Preschool

Was Citigroup's Donation To An Elite Y Nursery School A Kid Pro Quo?

Dec 9, 2002 | Fortune

We already have the Foreign Corrupt Practices Act. Should we add the Private Schools Corrupt Practices Act?

We ask, naturally, because of the saga that has lately spun out about Citigroup and its gift of $1 million to Manhattan's 92nd Street Y, home of a gotta-get-into preschool. Understand that for Citi, $1 million is not much money--only enough, in fact, to cover its expenses for about seven minutes. The amount pales beside the $880 million of Citi stock that CEO Sanford Weill recently owned, most of it gained through stock options. And $1 million is only 5% of the $20 million that telecom analyst Jack Grubman, now gone from Citi's Salomon Smith Barney, sometimes made in a year.

Yet the money that ties together Grubman, Weill, and the Y is sure to become an infamous part of Citi's history (and of comedy acts besides). As FORTUNE explained last issue (see Whatever It Takes), Weill is on a reform kick, trying to move Citigroupers--himself not excluded toward what insiders sometimes call "more socially acceptable " behavior. This tale suggests why the hardest kind of kick is needed.

A quick reminder of events from 1999 on: Weill asked Grubman, not a fan of AT&T, to take a "fresh look." Grubman began a review. But he also said in an e-mail to Weill headed "AT&T and the 92nd Street Y" that he'd love Weill's help getting his twins into the Y's preschool. Next Grubman upgraded AT&T to buy.

In early 2000, Salomon won some lucrative AT&T business. Other events, less noticed: Citi gave $1 million, spread over five years, to the Y, and the twins got into the school. Then, in October, Grubman demoted AT&T to neutral.

Weill now says the $1 million gift simply reflected Grubman's status as an "important employee who had asked for my help." Sure. Can the world be forgiven for thinking the money was a thank you--or flat-out delivery on a promise for an upgrade that Weill deeply desired?

Citi distributes money to charities both directly and through the Citigroup Foundation. The Y's $1 million was a direct bequest--by far the largest Citi made in 2000. Even the $200,000 portion actually paid that year exceeded all other direct gifts (including, for example, $175,000 that went to Lincoln Center).

As leaks from one party or another brought out the Y connection, some news accounts called it strictly a New York City story, reflecting residents' frenzy over their kids' education. But that view ignores Citi's widely dispersed shareholders, many surely offended by seeing their money used for, in effect, a bribe.

The mere idea of a bribe suggests how embarrassing this is for Weill and Citi's board of directors (whose members include FORTUNE's ultimate boss, AOL Time Warner CEO Richard Parsons). This particular board has persistently sloughed off questions about Weill's huge pay (amounting by FORTUNE's calculation to $150 million in the record year of 2000) and the lack of a succession plan at Citi. But a $1 million payoff to get toddlers into nursery school? Oooh.

This is a matter so deep that two board committees are apt to get called into action. There's public affairs, whose responsibilities include "ethics." That fits. Then there's a new nominations and governance committee, established in September. "Governance" resonates too. But in truth, assessing the Y events should be an easy call for any director. Using corporate money to pay off a private school is not only well short of "socially acceptable." It is outrageous.

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