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Rewiring Chuck Prince


Assuming the role of chief executive of the world's largest financial institution in October. 2003, didn't come easily to Charles O. Prince III. His natural inclination from day one was to hole up in his office and attend to the company's many pressing matters, just as he had done for almost two decades at Citigroup (C) and its predecessor companies. As general counsel to former CEO Sanford I. "Sandy" Weill, Prince's preference was to blend into the paneled woodwork of his spacious Park Avenue office.

Today, he is a different man. Prince is stepping out of the long shadow of his legendary former boss and pursuing his own strategy. Prince's Citi is selling off units amassed over the years, bolstering its retail banking operations, and beefing up investment banking overseas. His earliest gestures, which included a supplicating bow to Japanese authorities and the abrupt firing of three high-level Weill loyalists, signaled that he was no longer a Weill apparatchik.

But hard as they were, those steps weren't enough. Prince, now 56, came to recognize that a sprawling company like Citigroup needed more than competence and accountability in the corner office; it needed a charismatic leader. He had no choice but to try filling the bill. "I'm not used to operating in the limelight," he concedes, "but the difficulty of the moment demanded it. I had to get out front and say, 'we're going in this direction, follow me."'

It has been three years since Weill stunned Wall Street by naming Prince, who had no operational experience save an 18-month stint as head of the investment banking division, as his successor. At the time, little was expected of him, other than to be a loyal caretaker and crisis manager. He took over just as regulatory and public-relations troubles brought on by the collapse of Enron and WorldCom were doing maximum damage to the bank.

One year on the job and billions in legal fines later, Prince had met investors' low expectations, focusing mostly on regulatory matters and failing to become the commander in chief the bank sorely needed. His main objective at the time: "to keep Citigroup out of the headlines." He was failing there as well. Two big scandals erupted during his tenure: the Japanese private banking fiasco and charges of illegal European bond trading. And last summer the Federal Reserve, in a severe and unprecedented rebuke, banned Citi from making any future acquisitions until it got its house in order. It was a smackdown not only of the company's business practices, but also Weill's strategy of growth by acquisitions.

Looking back, Prince says he felt like he was flying with no navigation. He heard himself emphasizing to employees that he was in charge and that a plan was on its way. "I may not have known what it was going to be," he concedes, "but I knew it was coming."

Investors, meanwhile, had already soured on the shares of big, complicated conglomerates. Companies like General Electric Co. (GE) and Time Warner Inc. (TWX), with disparate operations and complex structures, couldn't find favor no matter how they performed. Prince's challenge is to prove to investors that Citi isn't too big to grow, and that it can do so without endless acquisitions. So far, they remain skeptical: Citi's stock has underperformed its peers.

Inside Citigroup, Prince must convince the bank's 300,000 employees, who span 100 countries, that he's more than a button-down lawyer, that he has the vision thing. "We're at a very important time for this company," said Sallie L. Krawcheck, Citi's chief financial officer, during a recent call with analysts. "It's important for us to act."

"SUPREMELY CONFIDENT"

Prince is making great efforts to change his management style. He has deliberately distanced himself from the qualities that landed him the job in the first place. His initial approach to leadership was to dictate rules and regulations; now he's fashioning himself a big thinker. He's working on his image, calling on CEOs like Michael S. Dell and Johnson & Johnson's (JNJ) William C. Weldon for advice. He has cut ties with key Citi veterans, cultivating what he calls a "new generation" of leaders. And he is turning away from the Weill strategy of being all things to all customers.

The question is whether it will work. Although Citi is still among the world's most profitable businesses, it's far from the growth company it once was. On Jan. 20, Citi reported fourth-quarter earnings of $6.9 billion, or $1.37 per share, two cents below the consensus estimate. Excluding a one-time boost from selling its asset management business last year, fourth-quarter profit fell 3%, to $4.97 billion. Earnings in its global consumer unit, which accounts for about 55% of the bank's profits, fell 23%, to $2.43 billion. Disappointed analysts rushed to cut their 2006 estimates. And some money managers, including Thomas K. Brown, a hedge fund manager with Second Curve Capital, began calling for a breakup of the company, hardly a vote of confidence for the CEO.

In the face of such adversity, Prince is getting out from behind his desk. On Dec. 16 at the annual Citigroup Investor Day, he dispensed with the long-held tradition of department heads making individual presentations. Instead, he emceed the two-hour event himself. "Bad behavior is aberrational," he told the audience, and although "never is a big word...the chances of [the company] getting into trouble again are virtually nil." Then he enthusiastically punched the air and declared: "I know where Citigroup is going!" Coming from someone else, a line like that might have been met with snickering. But from the understated Prince, it was reassuring, even inspiring.

"Chuck is trying to introduce a change of culture rather than reinforce a long-held one, and that's...difficult," says his friend Weldon. "It's one thing to talk, it's another to go out there and make sure it's reinforced and people understand you're serious. That's what [he] has to do."

Some former staffers aren't so kind. Prince "wants to emulate Sandy, but he doesn't have the personality and charisma," says a former executive. "Weill has intuition, skill, and ability. He has a steel trap for numbers ... Chuck has none of those talents."

At the Feb. 1 earnings conference call, Prince was as forceful about Citi's future as he has ever been. This "is a year for us to execute," he said. "This is not a year for excuses." He was equally forthright when he spoke to BusinessWeek. "I am supremely confident that [our strategy] will work," he said.

Surprising words from a man stunned to learn he had landed the job in the first place. On the July 4th weekend of 2003, Weill, just back from his annual European vacation, summoned Prince to his home in Upper Saranac Lake, N.Y. "This isn't good," Prince thought, figuring that Weill had struck some deal on the trip with the condition that Prince would have to share his job as head of Citi's investment bank. Prince's mind spun from anger to resentment to acceptance of his fate. He began making retirement plans, scouring the Internet for houses in Carmel, Calif., and carrying a printout of the listings with him on the plane for review. "I figured, I had enough money. I could deal with this," he recalls.

A ROCKY START

Things went differently, of course, and Weill publicly anointed Prince in July, 2003, and he took over two months later. Soon after being tapped for the job, Prince realized how much of a headache he had inherited. He went public with his two main objectives, which proved in hindsight to be embarrassingly naive: to get bigger -- much, much bigger -- and to stay out of the headlines. "We're going to be judged on whether we meet that standard or not," he told analysts.

And judged he was. On Aug. 2, 2004, Citi's London-based traders sold billions of European government bonds and bought them back at lower prices in a matter of minutes, throwing the markets in turmoil and agitating Britain's Financial Services Authority. In June, 2005, British regulators fined Citigroup $24.2 million for "failing to conduct its business with due skill, care, and diligence." In September, 2004, Japanese authorities ordered the bank to shut down its private banking operations after an investigation revealed a long list of securities law violations, including lax money-laundering controls. A week later, Prince was bowing before Japanese regulators, accepting their decision and taking responsibility.

Some critics blame Weill and Prince equally for the misdeeds. "This guy was the head lawyer through all this stuff," says the former executive. "Legal, compliance, risk managers... they all reported to him."

But others take a more complimentary view. As head of Citi's investment bank, Prince in April, 2003, negotiated a ground-breaking $1.4 billion settlement with New York Attorney General Eliot Spitzer over Wall Street conflicts of interest. Spitzer, hardly a Wall Street insider, is more forgiving than some of Prince's former colleagues. "The issues went to the heart of the entire investment banking business," Spitzer says. "It was the business model that lay at the root of the problem." In Prince, Spitzer says, he saw CEO quality from the start. "He was willing to step back and figure out the strategic impact of the settlement on the business rather than focus on the complaint itself,"Spitzer says. "He confronted the tough issues and acted more like a CEO than a general counsel."

Prince knew early on that his biggest task would be to distance the company from its past, without wrecking the 200-year legacy of the institution or undermining morale. That meant he needed to shatter the impression that, as a Weill loyalist, he was reluctant to embrace change or make unpopular decisions.

That first break is a deer-in-the-headlights moment for many new CEOs. How well they respond in the early days can shape perceptions for years to come. Investors "are looking up to you for clarity of communication, logic of the strategy, and laser execution," says Home Depot CEO Robert L. Nardelli (HD), another of Prince's mentors. "I know; I've been through transitions myself."

WEILL'S BLESSING

Prince may not have had a plan, but he wasn't afraid to act. In his first month, he summoned Thomas W. Jones, chairman and CEO of Global Investment Management & Citigroup Asset Management; Deryck Maughan, vice-chairman and CEO of Citigroup International; and Peter K. Scaturro, CEO of Citigroup Private Bank. He wanted to know why the scandals in Japan had happened and why they hadn't yet met regulators' demands for a clean-up. No one would take responsibility. So Prince fired all three on the spot, a move that would have seemed unimaginable even a few months earlier.

The bold action opened eyes. "Chuck Prince has extended accountability from numbers to behavior," says Howard K. Mason, senior financial analyst at Sanford Bernstein & Co., a research shop in New York. It was a watershed in his transformation of the Citi culture.

Then, on March 1, 2005, operation charisma began. Prince launched his "five-point plan," which included new standards for training, development, compensation, and annual reviews, all designed to inspire and monitor good behavior. Citi created a slick DVD sent to employees and journalists around the globe. Within two months, Prince personally addressed some 45,000 employees in 11 town hall meetings in 10 countries.

He has since taken bolder actions. In a rejection of the strategy that created Citi, Prince sold off its asset management and life insurance units last year. Under Weill, Citi was the most prolific acquirer U.S. finance has ever seen. Prince and his new team hope to create a more organic model. "One has to realize that the world is always changing," says Weill, who supports Prince's strategy. "The point is not to put your head in the sand. You must lead the change or at least respond to it."

Prince says that under his plan, growth will be internal, coming primarily from international markets. He calls Citi "a distribution company now," selling products like mutual funds, stocks, and investing advice across its vast network. He plans to invest in technology and training to link more closely the bank's brokers and bankers so they push more financial products and advice. The goal is to make more profits from each customer.

Prince aims to tap into Citi's key competitive advantages: its brand and its scale. His goal is to expand its consumer business from 53 countries to all 100 where Citi operates. In investment banking, he's targeting cross-boarder mergers and acquisitions. He plans to upgrade Citi Financial, the consumer finance unit, and go after the "newly affluent" with $100,000 or more in assets. And he will combine Smith Barney brokers and Citi retail branches at some test sites.

This was vision born of necessity. "The most successful CEO successions are not only when the person was completely different, but the era was changing, and to make that distinction was critical to the success of the company," says Kathryn B. Williams, chair of KRW International, a New York senior-executive development firm. The transition from Harvey Golub to Kenneth Chenault at American Express Co. (AXP) or Jack Welch to Jeff Immelt at GE come to mind, says Williams.

Prince says inertia is his biggest obstacle. "I have to be able to inspire people, to motivate people," he says. "That's my job. It cuts against traditional patterns of doing business, it's new, and it feels awkward at first."

But there are more concrete challenges. The bank has suffered a brain drain with the exits of such prominent figures as former No. 2, Robert B. Willumstad, and Marge Magner, former head of the global consumer business. Under Prince, Citi has made some high-profile hires such as James D. Wolfensohn, the former World Bank head who is now a senior adviser for Citi's international expansion plans. But more talent has left than arrived. Even Prince quipped at a Citi financial services conference on Feb. 2 that "half the people who used to work for Citi are at JPMorgan (JPM) now." A former board member says Citi's future may hinge on personnel: "It's all about leadership and the talent you can attract."

Prince says the key requirement of a strong leader is to accept change. He's reminded of that daily: In his office sits a glass box with a replica of a commercial shipping vessel that once graced the office of legendary banker and former Citibank CEO Walter Wriston, who died last year at age 85. When Wriston was in charge during the 1970s, shipping was the bank's largest revenue source. Today Citi doesn't even have a shipping finance department. Says Prince: "If you think that we've changed the consumer business and the world has come to an end, remember that the bank that Walter ran 30 years ago has disappeared."

Prince's maneuvers have been met with hostility by some employees and skepticism by investors. But his personal transformation is gaining traction. "We had to do a fair amount of restructuring, says Robert Druskin, head of Citi's corporate and investment bank. Prince "seems more confident these days. He has grown into this job."

By Mara Der Hovanesian


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