Citigroup: New government money means breaking board rules

It looks like the federal government will take a much larger common stock equity stake in Citigroup (C) than the one it already has. The government's ownership may be as high as 40 percent. Citi will need to find some private investors to put in money alongside taxpayers, and the board membership will change.

According toReuters, "Under the deal with Citi, a majority of the bank's directors will be replaced, though Chief Executive Vikram Pandit will keep his job." Pandit has done so poorly, the news is surprising, but the information about the board is shocking. In most cases all shareholders would have a chance to decide whether a board will be replaced and would get to vote on new members. In this case, that critical step is being skipped.

Two issues come out of the decision on the board. The first is whether the government is by-passing one of the most important rules of corporate governance: the shareholders pick the board. The other part of the government's actions that raise a red flag is whether the move is a takeover of the bank without calling it that.

Once an outside investor can name the board, a company is no longer independent. All of the other shareholders have lost their rights. It says a lot about what procedures the government will violate in the name of saving Citi.

Douglas A. McIntyre is an editor at 24/7 Wall St.

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