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It seems that the Board of Citigroup is finding it tough to identify a suitable replacement for Mr. Prince…(from the FT):

Josef Ackermann, chief executive of Deutsche Bank, has turned down an approach from Citigroup about taking charge of the US bank, underlining the lack of high-profile external candidates for the job.

I would suggest that this is because they are running up against three problems:

1. They are fishing in too small a pool: the number of people who have previously or are currently running large financial services companies (or even just big divisions within them) is very very small…but I imagine that the Board is probably thinking (who can blame them in these litigious times) that now is not the time for inspired and/or lateral thinking.
2. Impossible to align incentives: the only reason anyone would accept this poisoned chalice of a job would be in return for very significant - and guaranteed - cash; but of course that is unacceptable (rightly so) to the Board because it would be giving away a very expensive free option and send all the wrong signals to investors, employees, regulators etc. And remember, given (1) we are talking very significant cash (probably in EUR or CHF to boot, even models don’t want to be paid in USD these days…)
3. But the number 1 reason is that…(drum roll please)… it is an impossible job. Citigroup (and they are not alone here, it’s just more obvious sans CEO) is too big. And more importantly too complex for any one individual to manage efficiently in its current form. Like many mega-financial services firms, it is a jumble of heterogeneous businesses, risks and activities some of which gain greatly from economies of scale, but others that equally have significant dis-economies of scale. And the combination of all these businesses injects massive complexity. Let’s just say that I would guess Mr. Coase would find Citigroup “unoptimal”. They have too many variables and not enough equations. For anyone to claim that they could “do it” would just be hubris.

So what, should the Board just give up? Let it rumble along without a leader? Crazy as it sounds, I’m not sure they would be any worse off: it would probably save them a billion dollars of comp over the next 3-4 years and would avoid the risk of moral hazard thrown up by problem (2) and I’m not so sure the business would suffer unduly. It might get a bit testy at the top of the management pyramid but the people in the trenches probably wouldn’t see much difference in their day-to-day business. Of course the longer the Board takes to find someone, the more this case (might) be proved! But lest you dismay, even I am not so outrageous as to suggest the shareholders accept this as the least bad long term solution. No, if I were ADIA, Prince Waleed et al, I would be pressing Mr. Rubin to dedicating 2008 to the great unwinding/clean-up and switching my recruiting efforts to finding the 3-6 people who could lead (many of whom would ostensibly be Citi insiders) the future sons and daughter companies of Citigroup. Many of these proto-companies would not only be world leaders in their markets (like Citigroup), but would potentially be world beaters (unlike Citigroup); and there is no reason to think that in some instances they wouldn’t keep strong commercial ties with their siblings.

Just to be clear I’m not saying that building Citigroup was a mistake, just that it is unfinished business: a lot of interesting reactants have been brought together in solution, but now the end products need to be precipitated out. (Apologies to the non-chemists if this seems a strange metaphor.) Otherwise you’re just stuck with a beaker full of gray gloop, and the risk that it might explode to boot!

Finally some of you might be thinking “you’re just saying this because you aren’t up to the job and therefore can’t imagine that anyone else could be…hubris indeed!” Actually if its hubris you want, I would suggest that I could probably do as good a job as many (all?) of the candidates being considered - not the least because I would come without the same baggage and expectations, but am happy equally to admit that the complexity of the job (as currently specified) would be beyond my abilities. But let me finish by turning it around. Would you accept the job if it was offered to you? Seriously. Be honest. And if so, under what conditions? How much would you need to be paid?

The dilemma the Citigroup Board faces is that anyone who unflinchingly answers uncategorically yes (the usual “right answer” for a search) is disqualified as either a lunatic or a delusionary or both. Mr. Rubin I’m afraid I can’t help you with your search but I would be happy to serve at the pleasure of the Board if you want to brainstorm on reaction coordinates and such.

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