Nocera, solo

In “Bank of America Stiffs Shareholders” Mr. Nocera says that for  a while, bank officials accepted a binding resolution forced upon them. Then the board acted on its own, until the shareholders revolted.  Here he is:

The year 2009 was rough for the Bank of America and its chairman and chief executive, Ken Lewis. On Jan. 1, the bank closed its $50 billion purchase of Merrill Lynch, a deal Lewis had hastily negotiated the previous September, as the financial world appeared close to collapse.

Just weeks later, it all came a cropper, after Bank of America revealed, shockingly, that its new unit had lost more than $15 billion during the fourth quarter of 2008. That bank had to ask the government to backstop $118 billion in Merrill’s toxic assets, and to provide it $20 billion in additional capital. The stock dropped below $7 a share from over $33.

Furious shareholders sued. But they also did something else: Led by the Service Employees International Union and Finger Interests, a Houston hedge fund, shareholders offered a binding resolution at the annual meeting calling for Lewis to step down from his role as board chairman. The idea was that having separate people serve as C.E.O. and chairman would provide additional board oversight.

The resolution narrowly passed. Several participants have since told me that they believe it’s the only example of shareholders passing a binding resolution over a board’s objection.

Fast forward to last October. Without question, Bank of America has come a long way since those dark days. Under Brian Moynihan, who has been the chief executive — but not the chairman! — since 2010, the company has “reduced leverage, rebuilt its capital and simplified its business,” according to Jonathan Finger, comanaging partner of Finger Interests, which remains a shareholder. But the bank has also had trouble passing the Federal Reserve’s “stress tests,” had a $4 billion accounting error in 2014, and its stock has underperformed its banking industry peers.

Thus for all its improvement, the evidence suggests that the bank still needs the kind of rigorous oversight that an independent board — with an independent chairman — is supposed to provide. Yet, in October, without informing shareholders, the board decided to remove the provision in its bylaws splitting the roles, and anoint Moynihan chairman as well as C.E.O.

When they discovered what had happened, shareholders and corporate governance experts were, once again, outraged. “What hubris!” exclaimed Finger. Institutional Shareholder Services, an influential proxy advisory firm, urged shareholders to vote against the members of the board’s governance committee.

Barraged by shareholder criticism, the board announced just before its annual meeting that it would set up a special meeting to allow shareholders to vote on whether to give the board, as the bank put it, the “flexibility” to split or combine the roles, as it sees fit.

The most vocal critic of the board’s move has been Mike Mayo, an outspoken bank analyst at CLSA. He was especially scornful of a Securities and Exchange Commission filing the bank made late last month in support of the board’s move. It touted Moynihan’s “unparalleled depth of understanding,” and as proof, pointed to the $11.7 billion Bank of America earned “in the three quarters ending June 30, 2015.” (There was no mention of the $4 billion accounting error.)

“The gushing is like a teen magazine,” Mayo said. “This is supposed to be a regulatory filing.” In addition, he complained that using three quarters of a year as a benchmark was an example of the bank’s “cherry-picking data to make itself look good. It does that all the time,” he said. Mayo’s conclusion was that the document itself proved that Bank of America needed more board oversight, not less. Handing the chairman’s role to the chief executive was an example of the board “rolling over” for Moynihan instead of holding his feet to the fire.

I should note that Bank of America’s relationship with Mayo is contentious; it essentially believes he has been consistently wrong in his nonstop criticism of the bank. (He is one of the only analysts who has a “sell” recommendation on the stock, for instance.)

It also says that its decision to remove the bylaws provision was prompted by necessity; last October its chairman needed to resign quickly, and Moynihan, in the board’s opinion, was the best candidate to fill the role. In failing to inform shareholders, the board misread the situation, the bank acknowledges. It is now trying to rectify its error with the special meeting, set for Sept. 22.

To my mind, the core issue is not whether the bank is well or poorly run, or whether Mayo is right or wrong about the stock. It is the contempt the Bank of America board showed for its shareholders in quietly amending the bylaw — a contempt too often shown by boards that are supposed to protect shareholders, not defy them.

What the bank’s board did last October is not the biggest scandal ever; I know that. Instead, it’s the kind of small, corrosive scandal that too often marks the behavior of the modern company board.

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