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April 7, 2014 - The Management Blog

Hidden Costs of the Citi Succession

Stephen A. Miles and Nate Bennett

It came as quite a surprise when it was announced earlier this month that Citigroup (C) Chief Executive Vikram Pandit was leaving his position, effective immediately. Pandit’s tenure at the bank came during challenging times for the financial industry, and though some were disappointed by the bank’s performance under his leadership, there was evidence that Citi was finding its way forward from the recession. Even if the decision to force Pandit out was a good one, the way it was done shows the failure of a leader to understand the potential collateral damage caused by the way a decision is made and carried out.

Over the past two weeks, details surrounding Pandit’s departure have started to appear. The developing narrative suggests that the board chairman, Michael O’Neill, carefully orchestrated Pandit’s ouster. Over a period of several months, O’Neill worked on board members, sowing seeds of discontent with Pandit’s leadership and Citi’s progress. He deftly built a coalition that was enough to overcome any remaining support for Pandit. Pandit was reportedly summoned to O’Neill’s office and given the choice of resigning immediately, resigning at year’s end, or being fired without cause.

The sudden resignation of a CEO is always dramatic. The intrigue is heightened when so much of the action takes place out of view. The hidden nature of the process leaves many gaps that observers are left to fill with their best guesses. A critical group that has been left in just this position is the key employees at Citi. It is going to be difficult for the bank to move forward successfully without them, yet it may be that O’Neill’s approach to succession has increased the probability they will be left behind.

What is it about Pandit’s dismissal that would cause a lingering problem? It’s the unfair manner in which it appears to have been done. Employees engage in an ongoing reevaluation of their relationship with their employer. One of the most important elements employees consider in that process is the treatment the employer demonstrates toward employees. Fair treatment matters to each of us—particularly when bad things happen to co-workers—because it’s a signal about how we should expect to be treated should something bad come our way. For example, in the case of layoffs, when severance is generous, when notice is sufficient, when the decisions about who would keep and who would lose their positions are based on reasoned and carefully explained criteria, the employees left behind stay engaged.

In the workplace, fairness can be thought about three ways. Distributive fairness is the degree to which outcomes are distributed in a bias-free manner. For example, employees make judgments about the fairness of merit pay increases based on their own observations about one another’s performance. Procedural fairness concerns the degree to which a decision making process is fair. Continuing with the example of merit pay, employees will see the system as fair when the observers are expert and nondiscriminatory, when there is a process to appeal a decision, and when they have had an opportunity to participate in the decision. Finally, interactional justice concerns the degree to which interactions between individuals are characterized by mutual respect and dignity. Whenever employees conclude that unfair treatment has occurred, their further investment in their relationship with the company is at risk.

Taking a look at O’Neill’s actions through a justice lens—and you can trust that any lieutenants loyal to Pandit are doing just this—reveals cause for concern. Little of what has been reported suggests that Pandit received much consideration from the board when it comes to any of the three facets of fairness. In terms of distributive fairness, a case that Pandit’s performance has earned an embarrassing dismissal has not been made. In terms of procedural fairness, accounts make it quite clear that his termination was handled with no regard for his perspective. Finally, in terms of interactional fairness, what has been reported suggests that O’Neill treated both Pandit and his chief operating officer in a rather dismissive manner.

Of course, this is business, and some will argue that CEOs are well compensated and job security—or lack of it—comes with the territory. But to hold this view misses the point.

We have no doubt but that Pandit will survive the indignity of his removal as CEO. What matters here are the signals the board is sending to the leaders who need to be engaged and excited about the future for Citi to thrive. All together, it appears the board is not concerned with fair treatment of Citigroup executives.

That’s a costly signal to send when those people truly need to be on board. Pandit’s experience should provide a caution to Michael Corbat, the newly installed CEO, as well as to others who serve as a part of Citigroup’s leadership team.

Miles is the Founder and Chief Executive Officer of The Miles Group. Previously, he was a Vice Chairman at Heidrick & Struggles and ran Leadership Advisory Services. Bennett is a professor at J. Mack Robinson College of Business, Georgia State University. He is co-author (with Stephen Miles) of two books, Riding Shotgun: The Role of the COO and Your Career Game: How Game Theory Can Help You Achieve Your Professional Goals.