Wednesday, July 01, 2009

Uncle Sam's BofA Board

07/01/09 - 09:25 AM EDT


Eric Jackson

Last April, all eyes were on the Bank of America (BAC Quote) shareholders meeting.

Many expected CEO Ken Lewis to lose the title of chairman -- which he did. But others, including me, expected that such a result might be a precursor to Lewis losing his job entirely and to other changes to the board.

So far, Lewis still has his job, but in a very non-public way the government appears to be engineering a number of steps to change how the country's largest bank is governed. In my view, Lewis will exit the bank sometime between September and February.

At the April shareholders meeting, anger directed toward BofA's board poured out of the audience, even in hometown Charlotte, N.C. When the results of the voting were announced, shareholders approved splitting the chair and CEO roles and almost (by less than half a percentage point) approved the right for shareholders to call special meetings to replace board members. Had broker non-votes been thrown out (as they will be next year), instead of counted as a vote for management, it's likely that Ken Lewis and Temple Sloan would not have been re-elected to the board.

BofA responded to the voting by announcing that Dr. Walter Massey, president emeritus at Morehouse College, would assume the role as independent chairman. The board also threw its support behind Ken Lewis continuing as CEO, trying to quash suspicions that he would exit the company entirely.

Several observers, however, immediately questioned the "independence" of this new chairman. For one thing, Massey is 71 and the board has a mandatory retirement age of 72. Will he really take a long-term view to ensure the board operates in a fully independent way from management, as the role implies, or will he be more of a stopgap -- until the board and/or government figure out how this bank is going to be governed moving forward? Also, how "independent" can Massey be when he's served on BofA's board (and its predecessor BankAmerica Corp.) since 1993?

Massey served under Hugh McColl and his hand-picked successor, Ken Lewis, for over a decade. It's hard for anyone to make the mental switch from being a good foot soldier director to suddenly questioning past decisions. In short, how can Massey be part of turning the page, when he was complicit in all the past decisions which brought the bank to its current weakened position?

After witnessing how swiftly and aggressively the government stepped in to take control of General Motors(GMGMQ Quote), including insisting that Rick Wagoner be replaced, you would have expected similar draconian action for the biggest bank in the industry that arguably has been the most responsible for the current economic mess -- BofA, or as 60 Minutes referred to it last September in a glowing piece, the "King of Wall Street." Based on the reports of how Lewis and BofA were viewed by top officials at Treasury and the Federal Reserve, frustration among the government appeared to be fever high.

Yet, Lewis is still in charge at Bank of America (as is Vikram Pandit at Citigroup(C Quote)). Why? I think it's because the Obama administration decided that Wall Street's and Main Street's interests were aligned in seeing a higher stock market and the realization that their anti-Wall Street rhetoric in the first two months of this year had upset the market.

I think they also watched the ripples that followed the removal of Wagoner and worried that another high-profile ouster would send the message that they were being too authoritarian.

Instead, I believe the government has shifted to backroom diplomacy at a slow and deliberate pace.

Another wrinkle that has affected the dynamics of changing the governance of BofA is that the Securities and Exchange Commission is currently seeking comments on new rules that would affect proxy access for next year's batch of shareholder meetings. The agency is seeking to allow shareholders individually or in concert who have held at least 1% of a large-cap stock like BofA for at least a year the rights to nominate candidates for election to the board.

The candidates would sit alongside management's own roster of candidates on the company's own proxy sent out to all shareholders. The directors with the most number of votes for the open seats at the board table would be elected. The change, which CEOs oppose, would make it much easier to replace directors that a majority of shareholders believed were not representing their interests.

Given what's gone on over the last 18 months though, it seems likely that proxy access will pass and come into effect for next year. Given that, and the large number of BofA's shareholders who registered their displeasure in this year's vote, it seems likely that at least one shareholder will put up some alternate candidates for next year's slate of directors, and they'll stand a good chance of winning.

If you were an old BofA director, and you thought your chances of getting booted out next year were high, why would you stick around and go through that public humiliation. Better to leave now on your own terms.

And that's just what's happened. Whether being quietly influenced by the government or choosing to leave now on their own accord, seven of the bank's 18 directors who were re-elected in April have decided to leave.

They include retired Adm. Joseph Prueher, retired Gen. Tommy Franks, Jackie Ward, Patricia Mitchell, former lead director Temple Sloan, retired Lowe's CEO Robert Tillman, and Meredith Spangler. New directors appointed to the board include ex-Fed board governor Susan Bies, ex-FDIC Chairman Donald Powell, Paul Jones and William Boardman. Note the decidedly government bent to these new board members.

When will Lewis leave? We know both the board and he have said it will be in the next three years, but I believe it will be no sooner than September, when there will likely be more evidence that the economy is starting to turn the corner, and no later than next February, when the company would start to prepare its proxy materials for next April's shareholder meeting. Lewis wants to be able to claim his vision of a large BofA including Countrywide and Merrill Lynch is paying off. He wants to see more evidence of a housing recovery and earnings firepower from Merrill to do that. The government, to this point, is being respectful.

I'm sure both BofA's board and the government would like to show shareholders by then that the bank had turned the corner and will be a cornerstone of the U.S. financial system moving forward with strong leadership and governance.

But make no mistake: The clock is ticking down on Ken Lewis' time in the corner office. I think a change at the top by the end of this year is the most likely outcome -- with a successor named at the same time as Lewis announces his departure on his own terms.

At the time of publication, Jackson did not hold any positions in the companies mentioned in the story.

Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd.

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