Citi chair's new gig raises eyebrows
Why Dick Parsons's private equity deal with Providence should be called out as a conflict of interest.
(Fortune Magazine) -- Let me put this as simply as possible, because it isn't really complex, although it is important.
The eminent Richard Parsons, former chairman of Time Warner (the parent of Fortune's publisher), is chairman of the board of directors of Citigroup (C, Fortune 500), the immense, troubled financial entity. As such, he owes an unequivocal, clear-cut fiduciary duty to Citi's shareholders.
This duty means, among other things, that Parsons must put the interests of Citi's shareholders ahead of his own or anyone else's. He must avoid any conflict of interest in any situation involving Citi. He must disclose every single thing he does and any investment or remuneration he makes or receives that has any connection, however remote, with Citi.
Let's go on. One of Citi's millions of clients is a large private equity firm called Providence Equity Partners. Providence owns stakes in companies like MGM and Univision, and it is constantly in the market for other investments and in need of financing.
Citi is involved as principal and/or lender in many private equity transactions with many other private equity firms, to which it owes, at the minimum, a duty of good faith and fair dealing.
Now, get this: It was announced last month that Parsons will -- simultaneously with his being chairman of the board of Citi -- serve as a senior adviser to Providence. He will be paid by Providence, and if normal private equity practice governs, he could get a bonus depending on how much money Providence makes.
That means Parsons will be chair of a huge lender to Providence and will at the same time be an employee of Providence. How this can possibly be allowed -- how it cannot be a severe conflict of interest -- is impossible to understand.
Bear in mind, a spokesperson for Citi says that Parsons has the approval of the Citi board of directors for this move, as long as he recuses himself from taking part in any decisions Citi makes about Providence. The spokesperson further insists that Citi would not allow "even the appearance" of conflict of interest.
But how would that work in practice? There may be occasions when Providence needs financing. Historically Citi sometimes lends in these deals. (Though it fell through, Citigroup was signed on as a financial adviser and lender in Providence's $51.5 billion deal to acquire BCE (BCE).) Parsons says he will not take part in those decisions.
Yet how can any official of Citi possibly go against a deal in which his boss is involved? What foolhardy officer at Citi would turn down a deal offered by a company in which his boss has an interest? How can Citi possibly negotiate hard for the best terms for Citi's shareholders in such financing if it would go against Providence, a firm that Citi's boss obviously likes a lot? And the easier the terms are for Parsons' pals at Providence, the more money they will make on successful deals and the less Citi's shareholders will earn.
(This is not to mention the comically obvious problem that Citi is up to its neck in a swamp of troubles. Does that not require the full-time attention of the chairman of the board? Is he so good at rescuing megabanks that he can do it and another major job at the same time?)
By the way, I view conflict-of-interest allegations with some suspicion. Recently your humble servant was accused by various bloggers of conflict of interest for doing ads for a company that sells instant access to one's credit scores while at the same time writing about federal fiscal and monetary policy. To me, this was like accusing a movie critic of conflict of interest for advertising popcorn.
Still, in the minds of some, the allegations stuck, and it was unfortunate. I do not want to be similarly randomly harsh to Parsons, who is, I am sure, a fine fellow. But the conflict of interest here seems to me clear-cut. One side makes more money if another side makes less money, and Parsons is on both sides of the deal.
Maybe I'm wrong. Parsons clearly does not see a problem. It is a bit stunning that Citi's lawyers do not see one. If the situation blows up, I feel fairly sure a class-action lawyer will. But, then, I am a lowly outsider and not part of the Wall Street system that has served us so well. What do I know?