Citigroup has been a case study in the Applied Leadership Seminar for some time.  I use it as an example of the “Demon of Misguided change,” a problem that occurs in companies when management attempts to solve problems through excessive and repeated restructurings.  Starting in 1997 Citigroup began a massive growth initiative through a series of acquisitions.  Three successive CEOs, Sanford Weill, Charles Prince, and Vikram Pandit, presided over deep rounds of layoffs and reorganizations that led to excessive risk-taking and mis-steps, culminating in the bank’s collapse and huge bailout by the US government in 2009.

Imagine my excitement in seeing the newly appointed CEO, Michael Corbat, embrace a recovery platform based on old-fashion performance management.  See the WSJ article below.  Here are some noteworthy quotes:

“You can’t manage what you can’t measure.”

“You are what you measure.”

“Improper incentives lead to improper behavior.”

“The most important job of the CEO is to make sure the right incentives are in place.”

Being a chief executive, especially in a large publically traded company, is a journey into the  “gray zone.”  There are no easy answers and most often nothing is “black and white.”  The pressure from boards and security analysts to demonstrate action is intense.  Often this pressure leads to the overuse of the restructuring lever.

Enlightened leaders like Michael Corbat look at transformations through a broader lens of options.  In Applied Leadership we talk about four levers:

1. Change People – do this opportunistically where talent in nurtured and grown rather than wholesale head cutting.

2. Change Processes – most effective of all short-term levers especially if done thoughtfully in areas of performance management and rewards.

3. Change Behaviors – the most effective lever in the long-term

4. Restructuring – big bang visibility but massive culture damage if done repeatedly and excessively.

Mr. Corbat has chosen the process change lever by creating performance incentives that align employees around five goals in a balanced score card:  capital, clients, culture, costs, and controls.  It is the right action in mind and is a step in the direction of ultimately changing behaviors.   Through incentives, performance measures encourage employees to act-out behaviors that overtime can be adopted and internalized.

The main risk of transformation driven by performance management is reflected in the dark side of Mr. Corbat’s quote, “You are what you measure.”  The dark side is that – you foreclose on being something else, i.e., a potential can go unseen and missed.  The wrong measures and incentives can be disastrous.

Citi’s CEO Is Keeping Score

WSJ March 4, 2013

By Suzanne Kapner

Four months after taking over as chief executive of Citigroup Inc., C -0.42%Michael Corbat is putting his stamp on the company with a simple formula: You can’t manage what you can’t measure.

At a gathering of 300 executives last month at a Hilton Hotel in East Brunswick, N.J., Mr. Corbat proposed a slate of new, more-rigorous ways to track both the performance of individual executives and the third-largest U.S. bank as a whole, said people who were there. His approach includes score cards that will rate top managers across the New York company in five categories.

“You are what you measure,” Mr. Corbat told the gathering.

Any hope that investors were getting new, dynamic leadership atop Citigroup with the resignation Tuesday of Vikram Pandit didn’t have to wait long to be disappointed. MarketWatch’s David Weidner explains on The News Hub. Photo: Reuters/Citigroup.

Banking executives like to think of their job as a delicate dance between serving clients, selling products and making money—for the company and for themselves. Adding to that mix, Mr. Corbat wants to more-closely track how executives perform against their financial plan. “You said you would do this. Did you?” was how one executive described Mr. Corbat’s approach.

The quantitative focus is the sharpest sign yet of how Mr. Corbat is likely to differ from his predecessor, Vikram Pandit, who was forced out by the board in October after a series of mishaps. More clues to Mr. Corbat’s thinking are likely to come Tuesday, when he is scheduled to speak to analysts and investors at a financial conference in Boston hosted by Citigroup.

The initiatives are designed to bring more accountability and discipline to a company that has been considered by regulators, politicians and some investors as too big to manage after it required $45 billion in government aid to stay afloat during the financial crisis.

Mr. Corbat isn’t alone in making greater operational efficiency a priority. Antony Jenkins, chief executive of Barclays BARC.LN -4.67%PLC, has adopted a similar strategy as an antidote to the slow economic growth that is crimping industry profits.

And New York Mayor Michael Bloomberg, who dined with Mr. Corbat during the recent two-day summit, also subscribes to the philosophy, popularized by Peter Drucker, the management guru, that to manage something, you must objectively chart progress against stated objectives, according to people familiar with his thinking.

Mr. Corbat is expected to unveil quantifiable targets that will allow analysts and investors to more-easily gauge the company’s performance, said the people familiar with the plan. Those goals are expected to be similar to ones outlined in a new executive compensation plan that grades performance based on return on assets and tangible common equity, the people said.

Citigroup has had a mixed track record of making good on goals in the past. It exceeded a target set in 2010 of boosting assets from continuing operations by 5% a year, but fell well short of another benchmark that would have required a return on those assets of 1.25% to 1.5%. In 2012, the return was 0.85%.

Citigroup has run into problems when former chief executives set goals that led to excessive risk-taking. Sanford Weill, who presided over the 1998 merger that created the company and served as chairman and CEO through 2003, famously promised to double the company’s earnings every five years. Charles Prince, his handpicked successor, focused on raising market share, said people who worked with him.

“Improper incentives lead to improper behavior,” said Mike Mayo, an analyst with CLSA Crédit Agricole Securities. “The most important job of the CEO is to make sure the right incentives are in place.”

The 52-year-old Mr. Corbat is hoping to instill the right incentives through the use of score cards that will grade the 50 or so top executives based on a set of weighted goals from five categories: capital, clients, costs, culture and controls. The highest score is 100%; the lowest is minus 40%, said people familiar with the plan.

“The concept is a good one, but it’s important not to measure every widget, because the numbers aren’t going to tell you the whole story,” said Cliff Rossi, a former Citigroup risk officer who is now a Tyser Teaching Fellow at the Robert H. Smith School of Business at University of Maryland.

Most large financial companies use some type of metrics to gauge their progress. Under Mr. Pandit, Citigroup used score cards for some departments, but not others. Mr. Corbat intends to make their use more consistent across the entire company. Mr. Corbat declined to comment.

Mr. Corbat’s plan to roll the score cards out to all divisions has raised objections from some executives who view the strategy as too much of a “one-size-fits-all” approach, said people familiar with their thinking.

They have argued that technology, legal, risk-management and other divisions don’t lend themselves to this type of measurement, these people said.