Bank of America Must Remove Ghost of Hugh McColl from Board

By Eric Jackson, Senior Contributor

12/02/09 - 01:02 PM EST

Stock quotes in this article: BAC

NEW YORK (TheStreet) --

Reports are out today that several of the candidates under consideration for the top job at Bank of America(BAC Quote) have called on the board to consider breaking up the bank. They are having none of it. As a result, the CEO search for Ken Lewis' replacement continues.

All in all, you would have to give the board of Bank of America an "F" for how they've monitored management and succession planning since a firestorm enveloped the company last Fall.

Primarily blame for the lack of preparedness the board has shown to having a successor for Ken Lewis waiting in the wings lies at the feet of Hugh McColl, Lewis' predecessor. McColl has really shaped what Bank of America has grown into. It won't change until his ghost leaves the board by having directors he appointed step down.

On a "Frontline" episode from last year describing the financial meltdown, McColl, who is still the bank's chairman, recounted how he'd masterminded turning the small NCNB National Bank of North Carolina into the Bank of America juggernaut. He said that, as a company, "you're either growing or you're dying."

He took that advice to heart and did a series of acquisitions of companies to create a national titan in banking. And that's why it's unlikely this bank will break itself up now or while McColl is still around. It's just not in their corporate DNA.

Bank of America is the house the Hugh built. He hand-picked his board to be his lapdogs. He hand-picked his successor, Lewis, to carry on exactly in the fashion he had led the bank.

Lewis didn't miss a beat. In fact, he took it up a notch, making increasingly bigger acquisitions. Lewis' tenure as CEO will be defined by his acquisitions of MBNA, Fleet Bank, Countrywide, and Merrill Lynch. The bank is now enormous.

Yet, Lewis didn't like how he was treated by the government and the press. He was used to being seen as Ken the Conqueror, not a lightning rod for criticism. So, he decided to take his ball and go home. His decision to quit after the summer left the board completely flat-footed.

Succession planning is only something a company is judged on when they do it badly. The fact that Bank of America is now having such a hard time filling the top spot signals how poorly equipped this board was to do scenario planning.

It's a pretty basic question that every board must always think about: what would we do tomorrow if the CEO got hit by a bus? Most of the time, there are two to three internal candidates' names which easily come to mind. Nine times out of 10, a board would rather select an internal candidate for the knowledge of the company, industry, customers, and employees who will be able to take the company forward.

All of the largest banks in America appear to have done a poor job of internal talent development, but Bank of America is by far the worst. Why?

At the end of the day, the bank's directors were charter members of the "Friends of Hugh" club. Their primary job as a director was to rubber-stamp whatever Hugh wanted to do. If Hugh didn't bring up the issue of succession planning, it didn't need to be considered.

That's why, starting after the spring shareholders' meeting (at which there were several directors who received large numbers of "against" votes) the Federal Reserve has started reassembling the board of directors. That's something we first started mentioning here over the summer.

This revamped board was still not able to get an effective succession process in place to prepare for Lewis' surprise departure. They should entertain all kinds of scenarios such as breaking up the bank. In my view, it epitomizes a "too-big-to-fail" financial institution and hasn't demonstrated that it can manage the disparity and scope of so many businesses.

If the Fed really wants to see the company change though, it should remove all directors who have ties to Hugh McColl. Once that happens, this board will start to rethink how this bank should be run from a truly fresh perspective. And they’ll probably conclude it does need to be broken up.

At the time of publication, Jackson did not have any position in the stock mentioned.

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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Fortune: Is BofA ready to free itself from TARP?

Skeptics say it's too early for Bank of America, which was on life support as recently as January, to declare itself healthy enough to go it alone

By Colin Barr, senior writer

Last Updated: September 1, 2009: 3:34 PM ET

NEW YORK (Fortune) -- Is Bank of America really doing well enough to get off the government dole?

The Charlotte, N.C., bank is talking with regulators about repaying some of its $45 billion of Troubled Asset Relief Program debts, the Wall Street Journal reported Tuesday.

BofA (BAC, Fortune 500) wouldn't comment about the report. But it's no secret why the nation's biggest bank by assets might want to start wriggling out from under TARP.

Rivals, including JPMorgan Chase (JPM, Fortune 500), repaid the government in June, freeing them from congressional scrutiny. With that backdrop, the mere suggestion that BofA may be ready to write a check to the Treasury was well received by some analysts.

"We think that an initial payment signifies that [Bank of America] is not facing any major setbacks since reporting solid Q2 results," Standard & Poor's equity analysts wrote Tuesday, referring to the bank's better-than-expected profit in the second quarter.

Wall Street was skeptical, though. The stock was down 5% in midday trading Tuesday, a day when bank stocks broadly were leading a market sell-off. And whether BofA is really healthy enough to follow in the footsteps of its peers is an open question.

Though the economy has shown signs of recovering, skeptics contend it's too early for banks such as BofA -- which in January was under such financial stress that it was forced to announce it had lined up $138 billion in federal support -- to give money back to the government.

Whitney Tilson, a fund manager who is betting BofA stock will fall, said he believes the government shouldn't accept TARP repayment from big banks until the economic recovery is further advanced and the possibility of another downturn -- a so-called double-dip recession -- can be ruled out.

"The last thing you want is for banks to pay back money now and then need it later," he said. "You need to show you're really out of the woods. To me, that hurdle is a very, very high one."

To that end, Tilson questions the strength of the summer rebound in housing. He said he believes home prices nationwide aren't likely to hit bottom until next spring at the earliest -- which means more losses for banks such as BofA, which has $590 billion of consumer loans on its books.

There are other signs Bank of America could still be vulnerable should the market optimism that took the broader market up almost 50% fade.

While the bank has been setting aside more reserves for credit losses, problem loans have been growing even faster.

Since the second quarter of 2008, BofA has set aside $47.5 billion to cover credit losses, and its loan loss reserve has doubled. Yet its coverage ratio -- comparing the size of the loan loss reserve to the amount of nonperforming assets -- has dropped to 116% from 187% a year earlier.

And with unemployment at its highest level since the early 1980s, losses on credit card, commercial and residential loans are expected to keep rolling in through next year.

"It would be unwise for people to forget about the problems in their loan book," said Tilson. "They've got an awful lot of exposure."

To be sure, the bank -- like the rest of the economy -- looks a lot healthier than it did six months ago, when its shares traded at multidecade lows. Since then, BofA shares have risen sixfold, fueled in part by the bank's $7.5 billion first-half profit.

The rally has helped BofA raise nearly $40 billion in new capital, more than filling the hole noted in the government's stress test and seemingly bracing the institution against further problems.

Analysts at R.W. Baird wrote in June that the capital raise "should be adequate to enable the company to earn through the current cycle with a low likelihood of needing additional government capital."

Still, Bank of America shares fetch barely half the price they traded for a year ago -- which helps to explain another reason why Lewis might like to start repaying BofA's loans.

A partial TARP repayment would be a feather for Lewis to put in his cap after two unpopular and costly acquisitions, of the Countrywide mortgage and Merrill Lynch brokerage franchises. Shareholders stripped him of his chairmanship in April, largely out of frustration with his handling of the Merrill deal.

"In his mind, this is a good way to resuscitate his legacy," said Eric Jackson, an activist investor who runs hedge fund Ironfire Capital and has no position in Bank of America stock. "He wants people to say the Merrill Lynch deal did work out, the Countrywide merger is producing -- that's where his head is now."

First Published: September 1, 2009: 3:23 PM ET

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Uncle Sam's BofA Board

07/01/09 - 09:25 AM EDT

BAC , C , GMGMQ

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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Citi's Vikram Pandit on the hot seat

Fortune

The FDIC is said to be looking to replace Pandit, a sign that regulators won't go easy on the managers of banks that might have failed without taxpayer help.

By Colin Barr, senior writer
Last Updated: June 5, 2009: 3:34 PM ET

NEW YORK (Fortune) -- It's starting to look like the spring awakening in bank stocks may not be enough to save the CEOs of America's biggest troubled banks, Citigroup's Vikram Pandit and Bank of America's Ken Lewis.

A top banking regulator is agitating for Pandit's removal, according to a report Friday in the Wall Street Journal. The clash between Pandit and Sheila Bair, the head of the Federal Insurance Deposit Corp., comes just a month after restive shareholders at Charlotte-based BofA (BAC, Fortune 500) stripped CEO Lewis of his chairmanship.

The FDIC told CNN it had no comment on the story. Citi (C, Fortune 500) says it stands behind Pandit, who took over as CEO at the end of 2007 and has spent much of his tenure trying to clean up the messes left by his predecessors Chuck Prince and Sandy Weill.

In a statement to CNN Friday, Citi chairman Dick Parsons said the company was "confident in our management."

BofA has similarly endorsed Lewis, and the three-month-long rally in bank stocks has quieted talk of wholesale government takeovers of these firms.

But given the massive investor losses at these banks and the failure of their top managers to anticipate the industry's meltdown last year, few would shed a tear at either executive's departure.

"These companies are sort of the poster children for the excesses that created this crisis," said Eric Jackson, an activist investor and managing member of Ironfire Capital in Naples, Fla. "I think it's appropriate for the regulators to push for substantial changes in management and on the boards." Jackson's firm does not own shares of either bank.

Citi and BofA have been the two biggest bank recipients of federal aid since the financial crisis erupted last fall. Together they have taken some $500 billion in federal aid, the lion's share of which has come in the form of federal guarantees of their troubled assets.

Recently, both firms have shown some signs that they have broken out of what earlier this year looked like terminal decline.

Shares of Citi have tripled since Pandit surprised Wall Street by saying Citi was on track for its first quarterly profit since mid-2007. BofA's stock price has quadrupled during the same time frame.

Both banks went on to report better-than-expected first-quarter results in April. Those surprises further boosted the shares even as many observers warned the numbers were padded by one-time gains and legal but incredible accounting maneuvers, such as profits tied to the declining value of the banks' own debt.

The hopes of a banking sector recovery only intensified after regulatory stress tests showed banks didn't need that much more money. The findings helped spur a surge of capital raising from the private sector that has bolstered the balance sheets of many big institutions.

But while investor fears of a giant bank failure have dissipated, regulators haven't lost sight of the problems ahead. Though the 10 of the 19 biggest banks that had to raise $75 billion in capital after the stress tests had no trouble doing so, future loan losses will surely dwarf that figure -- which means further capital raises could be necessary.

"There's a desire to make sure the banks don't get complacent," said Douglas Elliott, a former investment banker who is an economic studies fellow at the Brookings Institute in Washington.
"Until we have a better grasp on exactly how bad the losses are going to be, it's important to be cautious."

Even before the FDIC's push to oust Pandit came to light, it was clear that policymakers intended to shake up the big banks.

BofA named a new chief risk officer this week after regulators questioned the management failures that led BofA into its current morass. Citi shook up its own board earlier this year, with former Time Warner (TWX, Fortune 500) chief Parsons replacing Win Bischoff as chairman and Clinton administration Treasury Secretary Robert Rubin stepping down. (Time Warner is the parent company of Fortune and CNNMoney.com.)

Still, skeptics such as Jackson say a change here and there won't be enough, given the size and visibility of the two big banks.

"How can you have such massive failures without there being accountability?" said Jackson. "Citi and BofA are so large, so critical, they're almost a case unto themselves."

And some observers believe that even management changes won't be enough, and BofA and Citi will have to be broken up.

Vernon Hill, a longtime bank executive who is now chairman of investment firm Hill-Townsend Capital in Bethesda, Md., notes that a recent national customer satisfaction survey showed Citi was either last or tied for last in each of the five regions in which it does retail banking.

"Citi has been dysfunctional as long as I can remember," said Hill, who owns "only minor amounts" of both stocks. "How many times are we going to let these guys get in trouble before we put an end to it?"

CNN's Amy Sahba contributed to this report.

First Published: June 5, 2009: 2:33 PM ET

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BAC Directors Don't See Their Future

Reading about how Bank of America's (BAC) directors have expressed full confidence in Ken Lewis staying on as CEO and how they didn't discuss any other director taking over as Chair than Walter Massey.

Massey has been on the board (and its predecessor board) for over 15 years, so he knows BAC. However, he has no banking experience in his own career background. Also puzzling, he's approaching BAC's mandatory retirement age.

Some critics have said this is an 18 member board that was hand-picked by Lewis and is showing favoritism to him instead of doing what's right for shareholders. I agree.

What these directors don't realize is that, with SEC rule changes coming next year including tossing out broker votes, it will be highly likely (unless BAC pulls off a Hail Mary type of stock performance between now and then) that Lewis (and probably several other directors) will be fired directly by shareholders at the ballot box.

It's another example of why this board is out of touch and needs fresh eyes on it -- including in the CEO spot.

Position: None.

Originally published in RealMoney.com on 5/2/2009 8:35 AM EDT

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BAC and C Need to Turn the Page with New Leaders

Bank of America (BAC) piled too much on its plate in terms of acquisitions -- especially the most recent ones that are so much larger than the little retail branch acquisitions that have been their bread-and-butter through their history.

However, there's a simple answer to their CEO question: he should leave. Imperial CEOs and their lackeys like to create this myth at times of stress and pressure that they are "indispensible men." Some shareholder during yesterday's BAC annual meeting even got up and asked the audience of shareholders: "If not Ken, who's going to lead us?" [To which he got a hearty applause]

I think there's an abundance of managerial talent available -- outside the bank if not inside the bank. The best thing for BAC shareholders (and for the ones of another embattled bank, Citigroup (C)) would be for a change at the top. Maybe they're good guys who are a victim of circumstance, but you would have to acknowledge that Ken Lewis and Vikram Pandit have failed their test of leadership in the last 18 months. It's time to turn the page and move on.

I would argue that Lewis has no credibility now after yesterday's vote to stay on as CEO. People need to realize that most of the BAC shares held by brokers were automatically counted towards his re-election yesterday and for him to keep the Chair and CEO titles. Had those votes not counted either way -- as will be the case thanks to the SEC starting in 2010 -- the votes against him (and the other directors) would have likely been 15 - 20% higher than the numbers reports.
This means a real majority of shareholders voted down the re-election of several BAC directors yesterday and almost three-quarters opposed Lewis keeping the Chair title.

That's not a mandate to continue leading. It's time for Lewis and Pandit to go.

Position: None.

Originally published in RealMoney.com on 4/30/2009 7:57 AM EDT

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Government says C and BAC need capital: Look to Debtholders

News leaked out overnight that the government is now pushing Citigroup (C) and Bank of America (BAC) into raising more capital.

The news is likely short-term bullish for the markets but bearish for Pandit and Lewis keeping their jobs much longer.

Tomorrow is D-Day for Ken Lewis, when he'll face down his shareholders at the BAC annual meeting. A large 'against' vote cast against his re-election could spell curtains for him. This news doesn't help him and he and his supporters will take note of the timing of the leak.

After watching the Bill Ackman and Joe Steiglitz interview with Charlie Rose from last week, I wonder why the government doesn't look to these banks' debtholders as sources for the needed capital -- namely in converting their debt to equity. The taxpayers aren't going to sign another blank check and private capital doesn't want to be a hero. Forcing these debtholders into equity will get these banks to quickly get out from paying endless interest and force them to grow their capital by making loans.

Position: None.

Originally published in RealMoney.com on 4/28/2009 7:42 AM EDT

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John Thain vs. Ken Lewis vs. Hank Paulson vs. Ben Bernanke

There's something highly annoying about watching the blame game playing out over the last week, first with Ken Lewis blaming Hank Paulson and Ben Bernanke and, this morning, with John Thain getting in some licks against the guy who saved his firm from a Lehman-like outcome.

The press and shareholders often complain about the size of executive compensation (as well they should), but the truth is that execs and most notably CEOs (not unlike politicians) are driven by a more powerful motivation (especially towards the end of their careers): preservation and enhancement of their reputation and legacy.

What prompted Ken Lewis last week to point the finger at the US government for Bank of America's (BAC) troubles is the fact that he'll be facing the music this week at his shareholders' meeting. There will be a large number of highly respected shareholders voting against him and he might well follow Terry Semel's lead and resign a few days afterwards, if the votes against are large enough.

In Lewis' mind, his life's work (building up BAC into the world's largest financial supermarket -- no longer a positive -- buying FleetBoston, MBNA, Countrywide, and Merrill) is about to go by the boards with a negative vote. That would be even more devastating to him than losing his job or a paycheck.

Lewis is putting up his last defense in striking out at Paulson and Bernanke. Nothing personal guys, business is business.

For Thain, the situation is different. This is a guy that should have another good 15 years in front of him as a major financial services CEO. Now, that's in question since he decided to move up the Merrill bonuses last year and the whole office deco-gate.

In my view, neither man is coming off well with their latest accusations and both will have to spend more time in the penalty box. For Lewis, that might include a large mark is his career accomplishments after this week's vote.

Position: None.

Originally published in RealMoney on 4/27/2009 7:39 AM EDT.

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Shareholders Unite: Ken Lewis Ousted as Bank of America Chairman

Ken Lewis has been removed as Chairman of Bank of America (BAC), as we predicted earlier. Massey has been named Chair. It might signal Lewis' leaving the CEO role soon.

Results of the vote are here.

Shareholders almost approved a proposal giving them the right to hold special stockholder meetings (to oust directors during the year) -- missing the votes needed by 0.5%. They were also 9% away from approving the say-on-pay proposal.

What's scariest for any inept CEO or director about these results is that they included "broker votes" going in BAC's favor. That is, all the shares held by brokers who are never instructed by the underlying shareholder how to vote those shares usually throw them behind the current management and board. Next year, in 2010, that changes and those votes won't be counted. It's likely in most corporate elections, pro-shareholder votes on director re-elections and shareholder proposals will increase by 15 - 20%.

We might start to see some real changes in our boardrooms across America.

Position: None.

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SEC puts Under-performing CEOs and Directors on Notice

Some great news today that the SEC is planning to end the current broker vote rules. This is a "win" for any shareholder who is tired of seeing over-paid and under-performing directors re-elected by seemingly vast majorities of shareholders at their annual meeting.

Take the Citigroup (C) meeting earlier this week. Several in the media pointed out that, despite the large number of angry shareholders voicing their displeasure at the meeting, Citi's board (including Vikram Pandit) was "comfortably" re-elected with about 70% of the vote. Turns out this is really an inflated number.

As the Wall Street Journal reported today, these vote numbers are skewed because the large number of brokers, who hold shares in companies and never hear from the underlying shareholders as to how they want those votes cast, end up throwing them behind management.
The article discusses the upcoming Bank of America (BAC) meeting next week where Ken Lewis will face a lot of heat. Because Ken Lewis will have 1.22 billion broker votes in the bag from the start, he only will need to capture about one-third of the votes from real voting shareholders to "win" a majority of support.

The SEC, under Mary Schapiro, is saying that this free ride is over starting in 2010. These broker votes will no longer count towards the encumbents' stash. All CEOs and directors will truly have to receive a majority vote. That's good for everyone -- including, ultimately, the directors. We'll have much more vigilant boards and better capital markets.

If Ken Lewis survives the vote next week, he likely won't in 2010 under these new rules, which is why my bet is that he announces his departure sometime this summer (after declaring that BAC is stonger than ever and poised to reap the benefits of his Merrill and Countrywide deals).

Position: None.

Originally published in RealMoney.com on 4/24/2009 2:48 PM EDT

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Beginning of the End for Ken Lewis

Next week, on April 29th, Bank of America (BAC) will hold its annual meeting. An issue which will come to a head there in a shareholder vote is whether Ken Lewis should retain the two roles of Chair and CEO.

Longtime BAC shareholder Jerry Finger (who sold his bank to NationsBanK in 1996) put the issue on the proxy and is right to call for change, given the bank's disastrous performance in the last 12 months.

Late last week, we learned the 3 largest and most influential proxy advisory firms (RiskMetrics, Glass Lewis and ProxyGovernance) all threw their support behind the splitting of these roles. This means it's virtually assured that the split will happen, given how closely large institutions and pension funds follow these suggestions from the advisory firms.

In my view, this stripping of Lewis' Chair role makes it more likely that Lewis will also step down as the bank's CEO in the next year. He's already dropped hints that he is open to doing so "when the crisis passes" -- that's CEO-speak for "Ok, I'm getting tired of the abuse I'm taking."

If BAC really wants to show shareholders (including the government) that it's turning the page, a change at the top is probably best for everyone.

Originally published in RealMoney.com on 4/20/2009 9:01 AM EDT

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Boards Caused This Mess. Here's How To Fix Them

From Forbes.com

By Eric Jackson and Sydney Finkelstein

02.18.09, 11:25 AM EST

A simple two-step program for greatly improved governance.

Who's responsible for the swift and severe downturn in the economy over the last 18 months? Many groups deserve blame, but the most culpable group of all is boards of directors. They let their organizations leverage up enormously without fully understanding the risks or seriously considering the possibility that housing prices could level off or decline.

The last six years have proved beyond a shadow of a doubt that a tick-the-box legislated attempt to improve corporate governance, like the Sarbanes-Oxley Act of 2002, is just not sufficient; secondly, business leaders don't deserve a free pass to police themselves. We propose a two-part carrot-and-stick process, for both fixing boards and reducing the odds that such a calamitous breakdown in capital markets would happen again.

Politicians have a way of showing up at a crime after the fact (as long as it's serious enough to register with public opinion, that is) to produce legislation they hope will make people think they've done something to prevent the same problem from occurring in the future. Before September 2008, when Washington was forced to come to grips with the vastness of the downturn, politicians hadn't been so interested in business since the dot-com bubble burst eight years ago.

Back then, the drop in stock prices that savaged Americans' 401(k) portfolios was accompanied by revelations of egregious corporate wrongdoing at companies including Enron, WorldCom and Adelphia. Sarbanes-Oxley was the politicians' answer to that bad corporate behavior. It was supposed to make boards more vigilant and accountable for their companies' results. But it was utterly ineffective in preventing this biggest market breakdown since the Great Depression.

We know, from years of research and empirical evidence, that good governance does improve corporate performance and prevent corporate breakdowns. We also know that what makes governance "good" vs. "bad" has nothing to do with most of the "best practice" that finds its way into legislation. A board can be made up mostly of "independent" directors (however you define that); it can have some less tenured members and a chairman who is not also the chief executive officer, but all that has little to do with actual financial results.

The factors that most correlate with better governance and performance, it turns out, are things such as the quality of debate in board meetings, the open-mindedness of the CEO and the directors, whether the board does extensive scenario planning and whether it engages in playing devil's advocate when discussing possible courses of action. None of that is easily measured, so it can't easily be introduced into legislation. Yet it is absolutely critical to good governance.

Business leaders and their apologists at the Business Roundtable and Conference Board criticized Sarbanes-Oxley for years after it passed. They said it was too expensive, bureaucratic and good only for auditors, who got to raise their fees astronomically. They argued that Washington should take a much more hands-off approach. Businesses could police themselves, thank you very much. That point of view has been thoroughly discredited by the econolypse of the last year and a half.

In the two-part carrot-and-stick strategy we propose for improving the functioning of our country's boards, the carrot is better self-governance. Boards need to regulate themselves more effectively. The Securities and Exchange Commission can't be a fly on the wall to every board to tell it whether it's debating issues enough; boards must do that themselves.

The past year's massive destruction of both real capital and reputational capital at firms like Citigroup (nyse: C - news - people ) and Lehman should send shivers up the spine of every public company director. They should be seeking advice from other directors or consultants who have been successful at improving governance.

We have been involved since 2004 in implementing corporate early-warning systems at the board level to help directors address potential problems in a much more rigorous and systematic way. One basic measure of how a board is doing is whether it has an early-warning system in place. Boards must do everything they can to insulate themselves against failure.

But hoping public companies' boards will self-regulate is hardly sufficient. In our opinion, there needs to be a stick in place, too. To create it, SEC chairman Mary Schapiro and her commissioners need to swiftly enact something called proxy access. Today, when any shareholder in a public company wants to nominate a candidate for the company's board of directors, that shareholder must foot the bill and jump over an extraordinary number of hurdles.
The cost is, at minimum, $1 million for lawyers, mailings and proxy solicitors. The candidate must run against the incumbent board member, whose campaign is paid for entirely by shareholders. Imagine the same kind of stacked deck in favor of a one-party system in a political context--we'd call it Venezuela.

Well, U.S. shareholders have been trying to run against Hugo Chavez for years here, with Chavez protected by Delaware court decisions and SEC rules that seek to maintain the status quo (and that also keep the state coffers of Delaware filled, by the way). Proxy access would allow a shareholder who had held shares in the company for some time to nominate one or more board candidates on the company's own proxy. The challengers wouldn't have to pay the costs of mailing out proxies. If a challenger can make the case that he or she should be on the board in place of an incumbent, it should happen. May the best directors--not only the friends of the CEO--serve.

Critics of proxy access argue that shareholders who seek to be elected this way will either have extremist views (i.e., groups such as the AFL-CIO or Teamsters may gain more influence than a true majority of shareholders would want, and hijack the process), or "short-termist" views (i.e., shareholders will demand quick fixes for company problems instead of trusting management to do what's best for the long term).

In our view, these criticisms have no merit. Any potential director up for election to a board of directors, incumbent or challenger, needs to make a case for deserving the seat. We trust shareholders to judge for themselves. We believe Capital Research, Legg Mason (nyse: LM - news - people ), Vanguard, and other big investors can tell if a potential director is a crackpot or an extremist--or, on the other hand, a pawn of the CEO who will do nothing more than rubber-stamp his decisions.

We don't believe proxy access, if passed, will cause a major increase in board challenges, but there will be a few, and those could result in a sea change in board effectiveness. If board members are more closely tied to the people they are supposed to represent--the shareholders--they are bound to ask tougher questions. And that will be in everyone's best interests.

Eric Jackson is founder and managing member of Ironfire Capital LLC and general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd. Sydney Finkelstein is professor of strategy and leadership at the Tuck School of Business at Dartmouth and is author of Think Again: Why Good Leaders Make Bad Decisions and How to Keep It From Happening to You (Harvard Business Press, 2009).

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Good CEO/Bad CEO

RealMoney.com: Investing

By Eric Jackson

1/28/2009 11:45 AM EST

The bestselling author of Why Smart Executives Fail, Sydney Finkelstein is Steven Roth Professor of Management at the Tuck School at Dartmouth College. His upcoming book,Think Again: Why Good Leaders Make Decisions, coauthored by Jo Whitehead and Andrew Campbell and published by Harvard Business Press, expands on why companies run by sharp executives run off the rails.

After discussing the main themes of his new book and how they relate to the current market environment, we moved on to translating his research on executive and board decision-making into tangible investment ideas.

Jackson: What are examples of corporate leaders who make smart decisions and whose companies would make good long bets?

Finkelstein: I'll start with Jeff Bezos of Amazon (AMZN - commentary - Cramer's Take). That's a company that keeps on going even though no one gave it much of a chance in 2001. Remember that he had the foresight -- or good luck -- to tap the debt markets for $1 billion. This helped Amazon weather the storm after the Internet bubble burst. He's made his strategy work and he's innovative in ways that are complementary to the core business.

This is anecdotal, but I've had so many people ask me if my new book is coming out on Kindle. (Editor's Note: It is.) They've told me they wouldn't read it unless it did. Bezos has had a strong vision for what he wanted the company to be and stuck with it. He experimented with offshoots to the core business without getting too far afield. He also surrounded himself with good team members who appear to have been unafraid to challenge him.

Jackson: People worry about Amazon's high valuation.

Finkelstein: I'm not a valuation expert, I'm a leadership expert. However, I do know that good leaders do the necessary things to keep growing their businesses in sustainable ways. For that reason, I think Amazon is a good pick.

Another great corporate leader is Sandy Cutler at Eaton (ETN - commentary - Cramer's Take)(ETN). He's a Tuck grad, so I've had the chance to meet him several times at the school and he's always impressed me.

I haven't met anyone more knowledgeable about M&A. He knows how to integrate a company, how not to overpay. He's built a very strong organization around him. He always demands a good debate from the executive team. He also wouldn't be comfortable with me singling him out alone; he would always credit the team. Eaton's stock is down by half in the last year, but it's ahead of many peers in the market.

Google (GOOG - commentary - Cramer's Take) has also done a good job. It has one business that makes money and 29 that don't. A bunch of these that don't make sense have been jettisoned. Google is growing up. It was fine to experiment when times were flush, and you want to keep talented people around. Now it's being serious and cutting and not hiring.

New CFO Patrick Pichette seems to have done a good job here. No one could believe how well Google put the brakes on costs in the last earnings call. Capital spending dropped by half of what was spent a year ago and only 99 people were hired last quarter, down from thousands in past quarters. The company appears to have an excellent management team: It's not just Eric Schmidt, Sergey Brin and Larry Page. Shona Brown is also very strong.

Lastly, I'll mention General Electric (GE - commentary - Cramer's Take) and Jeff Immelt, even though the stock has been savaged. He was dealt the toughest hand you could possibly be dealt for an incoming CEO: following the most famous CEO ever, as well as dealing with Sept. 11 and the general stock market decline that followed. He's focused on some important themes: globalizing, going green and continuing to develop talent. He's controlled what he can control.

Jackson: Let's shift to examples of CEOs doing the opposite of what you advise and which companies, as a result, would make good short candidates.

Finkelstein: I'll start with Ken Lewis at Bank of America (BAC - commentary - Cramer's Take). It's amazing to me that he still has a job. Lewis cut his teeth as a credit analyst under Hugh McColl at North Carolina National Bank, later overseeing the bank's aggressive acquisition strategy. He got the top job in 2001 -- most people thought Lewis would be less acquisitive than McColl, but it has been just the opposite.

This is going to sound a little like armchair psychology,but for Lewis to be a major success at BofA, he knew he'd have to surpass McColl, already a legend in Charlotte for growing the bank into such a global powerhouse. How do you do that? You've got to make acquisitions and grow this bank even bigger. In 2003, he bough FleetBoston Bank for $48 billion. He bought MBNA in 2005 for $34 billion. And in April 2007, he bought LaSalle Bank for $21 billion.

He followed the Citigroup (C - commentary - Cramer's Take) failed "financial supermarket" strategy. Then BofA took on Countrywide for $4 billion and Merrill for $50 billion this year, with all the ticking time bombs in their portfolios. You're looking at another Citi. Lewis has been overly attached to his image of needing to be better than McColl.

There's another aspect to Lewis that relates to what we discuss in the book: He based his decision-making in 2008on misleading past experiences. BofA was built on many small bank acquisitions. McColl would cut costs and look for revenue enhancements, which gives you greater market power and heft. It's a great model, on such a different scale than Fleet, MBNA, Countrywide and Merrill.

Lewis thought -- based on Fleet and MBNA -- that he knew how to do these big acquisitions. He didn't. The due diligence was shockingly short on Merrill. This was a trophy acquisition. Reports are that Lewis wanted this jewel for a while. If the stock goes up, I would look to short it. I would bet there are more skeletons in their book.

Staying with financials, when you think of what Citi was and what it could have been, it's a tragedy. Citi has been incredibly slow to face up to problems. It took far too long to replace former Chair Sir Win Bischoff. There were rumors that he was on his way out for months. Dick Parsons appeared to be the de facto chair anyways, so what was holding Citi up?
It's also obvious that Citi moved too slow to break up the company. It's only been done begrudgingly and probably at the insistence of the new owners -- the U.S. government.

Vikram Pandit is a disastrous CEO. It's a tossup if he's worse than Charles Prince. You really wonder where was the board in all this? Why are most of the directors still there after making two terrible picks? When you think of the job of a board of directors, its most important job is hiring the CEO. Citi's board has failed twice now in this most basic function.

How they picked Pandit is a story in itself. He ran a hedge fund that seemed to be successful, but a year later Old Lane proved to have made many terrible bets. The performance plummeted, redemptions were through the roof and Citi needed to inject it with capital to keep it going. It has since been shut down.

Pandit was picked because basically any other senior talent in the company had been driven away months and years earlier. Pandit's been in way over his head from the start.
The lesson from Citi is: you've got to face reality immediately and move on. And for the board, the lesson is: you can't be attached to the CEO you pick. Your attachment can blind you to what's going on. Until there are major CEO and board changes, Citi is a short.

Finally, Jerry Yang at Yahoo! (YHOO - commentary - Cramer's Take) clearly made a number of poor decisions as CEO. First of all, he had an inappropriate attachment to Yahoo! from the beginning as a cofounder. From the outside, it also appears that he (and others on the management team) were very much against the idea of selling to the "evil empire" of Microsoft. As a result, he left $30 billion on the table for his shareholders.

Even now with Carol Bartz, about whom I've heard a lot of very positive things, I wonder whether Yang would approve a deal if it came along.

The other major problem with Yahoo! -- even more important, in fact -- is the tired board. It didn't pay any attention to Terry Semel, except when it came to approving his monster pay packages; let Yang be CEO when he wanted to instead of doing a thorough search; and let the company go through countless reorganizations with no results and no accountability.

How can you expect the rest of the organization to be accountable when no one on this board has been accountable? Even if Bartz is exactly the right CEO, she's going to be saddled with one of the worst boards in corporate America. What shocks me the most is that Yahoo!'s largest shareholders sit back and except this. They are gluttons for punishment.

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Interview: Why Good CEOs Make Bad Moves

From TheStreet.com

By Eric Jackson

01/27/09 - 05:04 PM EST

YHOO , BAC

Sydney Finkelstein is the Steven Roth Professor of Management at the Tuck School at Dartmouth College. He authored the 2004 No. 1 business best-seller, Why Smart Executives Fail, based on extensive research on what causes successful companies run by smart executives to suddenly drive off a cliff in terms of performance.

The book is as relevant today as it was in the post-Enron world of Sarbanes-Oxley. Indeed, it seems we haven't learned much from that period and have set ourselves up for the current -- even more serious -- economic decline.

I've known Syd for 12 years and worked on consulting projects with him. There are few people in Corporate America today who understand what drives CEOs and Directors as well as Syd.

He's about to release his new book, which he co-authored, called Think Again: Why Good Leaders Make Bad Decisions and How to Keep It From Happening to You. It's published by Harvard Business Press and is coming out next month.

I caught up with him earlier this week to discuss the current market environment, what caused it and what we can learn from it. The following is a transcript of our discussion.

(Note: I will also be writing an upcoming RealMoney article, where Syd discusses specific investment recommendations based on his research.)

Jackson: As someone who teaches and consults with CEOs and Boards, what surprises you most about what we've lived through in the last 12 months?

Finkelstein: There are three things that stand out to me. Number one: Why are there no people protesting in the streets? I find it hard to believe that people are so passive. We've all been witness to a high-jacking of the economy by many corporate executives and boards in the name of higher profits without adequate risk-protection.

Now, our government is deciding in its wisdom to dole out potentially trillions of dollars in our money -- without clarity on if it will work. The average person is losing his job and half of his 401k. Maybe we don't understand it; maybe it's a generational thing. We should be more upset and demanding more accountability.

We did a panel discussion recently at Tuck. There was an economist talking about the bailout and why TARP made sense. There was an investment person talking about potential return on investment for taxpayers with TARP. I talked about everyday people's reactions to what was going on. The bonuses which are considered Standard Operation Procedure on Wall Street are so far removed from the man-on-the-street. There was a major disconnect that still exists and needs to be bridged.

As a professor, I've given a lot of talks in my career, but I can tell you I've never had such a strong reaction as to that talk. Staff people, students, regular people from Hanover [New Hampshire] all came up to me afterwards. It touched a nerve with them. There are real people struggling out there now and just can't relate to the fantasy world of expected bonuses and $87,000 area rugs.

The second thing that strikes me about what's going on: Where are the shareholder activists? It's been astonishing to me to watch the growth of these activists in the last 10 years (including what you were able to do at Yahoo! (YHOO Quote - Cramer on YHOO - Stock Picks) using the Web). But where is Carl Icahn now?

The sad part of the activists' success in the past few years is that our Boards of Directors are so inept that we have to rely on outsiders to correct the problems which should be solved by management and boards within their own companies.

The third thing I notice is how little the so-called experts know about what we're living through. This is concerning for someone proud of America and our economy. Nobody really knows if TARP is the right answer, or how to make banks lend, or whether we should buy up toxic assets. As you can guess, I meet a lot of smart people from business, academia and government at Dartmouth and I can tell you that nobody knows what will work. And yet we're betting hundreds of billions of dollars on this.

Jackson: Well, who's to blame? Is one group more to blame more than another.

Finkelstein: Look, none of us is innocent. From people wanting to buy a bigger house than they could afford, to mortgage brokers, to the press, regulators, and even business schools. We've all got our fingerprints on this.

But is one group more deserving of blame? Yes, the corporate boards ultimately let these companies get in way over there heads on their watch. This wasn't malfeasance. It wasn't illegal. It's just that they didn't provide any oversight. They're supposed to ask questions and not just go along. They decided it was o.k. to accept high risk and high leverage.

I don't mean CEOs get a pass for driving their businesses for big bonuses. However, our system of governance is most to blame.

Jackson: Why do smart leaders make bad decisions?

Finkelstein: The way people actually make decisions is not at all how textbooks say we do and that's what this new book is all about. We don't identify a set of alternatives and weigh them with a best expected value in their head.

Jackson: We're not "rational economic beings" like economists argue?

Finkelstein: No, and we've known that for some time now. The data just do not support that view. We have evolved to make very quick decisions to get along in life. We generally make one plan at a time at the moment. We then run with that solution.

Jackson: Sounds like TARP.

Finkelstein: It's exactly like how TARP was developed. The role of emotions is paramount to making decisions. We have emotional tags tied to each decision we make. Some tags are stronger than others. Our brain remembers the tags that are most positively or negatively charged. We look at these tags with the most emotion when making current decisions and it shapes the choices we make. All this operates at the subconscious level. These processes have been developed by our brain over time and are very useful -- most of the time.

Problems occur when we start to face situations in our current environment which don't match situations we've faced in the past. We need to be conscious of our decision-making process and not succumb to past emotional choices.

There are four red flags we talk about in the book to be on the watch for in real-time, when facing new types of problems: (1) misleading experiences when we think we've encountered a similar situation in the past but misjudge its similarities to the current situation, (2) inappropriate attachments when we are making decisions about a group or people with whom we have past ties, (3) misleading pre-judgments when our past decisions color current decisions, and (4) inappropriate self-interests when we have different personal interests than the stakeholders we represent.

Jackson: Do these red flags apply to Dick Fuld [former CEO] of Lehman Brothers?

Finkelstein: Sure. With Dick Fuld, the biggest thing he did that ended up hurting Lehman was believing he could fix the mess instead of selling the company sooner. No suitors were willing to take a chance. He'd driven down his negotiating power. John Thain [former CEO of Merrill Lynch (acquired by Bank of America (BAC Quote - Cramer on BAC - Stock Picks)] -- leaving aside his interior decorating decisions -- saw the writing on the wall sooner and sold Merrill at a premium when he could.

Fuld also fell prey to misleading experiences. During the Long-Term Capital Management (LTCM) crisis in 1998, there was global uncertainty about what would happen and Lehman and Fuld got themselves through that. He came out looking like a hero. His experience taught him that he could do it again -- and there were lots of people in the press, earlier in 2008, who agreed with him. He was over-confident. He assumed this time was similar to LTCM. But this crisis was far more severe.

Another red flag about Dick Fuld is the attachment story. He was credited with rebuilding the firm when it was spun out of Shearson in the early 90s. He thought of himself as a founder -- as if he was a Lehman. His over-attachment caused him to not want to sell. John Thain had no such attachment. He was looking to sell out at the highest price.

Jackson: Most would say President Obama is smart. He appears to have surrounded himself with talented people. He has enormous goodwill from the American public. What are the biggest lessons he should take from your work in order not to squander the opportunity he has?

Finkelstein: He appears to have the right management style with what we've found works. He delegates with appropriate oversight without micromanaging. That's a real art. He also pays attention to the importance of symbols and customs. A lot of leaders have no clue about just how important it is to pay attention to the symbolic things that people always remember. He also appears to engender real debate without getting bogged down by analysis paralysis. I think his biggest risk is that he listens too much. At end of the day, there's only one leader and he has to decide.

I would also advise him, if he asked me, to never give up the high ground on values -- the fundamental values of what you believe in. He's come to power with a lot of high hopes. Compromise is important and part of the political process, but he's got to stick to some fundamental principals.

Jackson: I was struck by what you said in the book about pattern recognition. Hedge funds have gotten their share of the blame for the current mess. Many funds built quantitative models with bright PhDs in math, computer science and physics to predict the future. When the world changed, their models were found to be worthless and resulted in billions in losses and redemptions. If you were advising a hedge fund picking up the pieces now, how do you do pattern recognition correctly?

Finkelstein: A lot of people in hedge funds attribute their success to their genius -- on the way up. You think they're doing the same now? Arrogance is an incredible warning sign for later tragedy. Every one of their quant models was based on a set of assumptions. You have to understand those assumptions and whether your model is based on limited data.

The world changed. Going forward, they have to build new models and ensure they are monitoring and updating their assumptions as they go in a dynamic fashion instead of remaining static.

Jackson: You point out the risks of an over-confident leader. Shouldn't leaders be self-confident though?

Finkelstein: No one has ever been successful without self-confidence. Of course, you need a balance. It's tough but you need to find it. You have to be confident, willing and able, but you have to stay open to alternative points of views.

But again, boards play a big role in reining in out-sized egos. There are a lot of safeguards you should be aware of that we discuss in the book: avoiding yes men and ensuring a high quality of debate in group discussions. But there's no replacement for good governance. Boards need to be much more assertive.

Jackson: How do you do that? The SEC can't mandate assertive boards?

Finkelstein: You're right. Outsiders can't make it happen. It has to come from the boards themselves who are often self-perpetuating. You and I worked on a tool for boards to use to identify early-warning signs of problems. It wasn't a very successful tool because we found that most boards don't want to hear about the problems they have. No bad news is good news. And there's an army of consultants and search companies to always come around and compliment you.

However, the evidence of the last 12 months is clear: If boards don't do a better job identifying early-warning signs, their companies will fail. I guess that's my hope, that boards become afraid enough so that they'll make the necessary changes themselves. The government cannot regulate good governance. We're talking about quality of decision-making and interaction here. You're not going to be able to put something like that in a Sarbanes-Oxley.

Jackson: How should CEOs and boards safeguard themselves against killing their companies?

Finkelstein: Do you have high-quality debate in your management team or board or are you an "imperial CEO" who has driven away anyone with a different opinion than you? Are you surrounded only by "yes men" or a bunch of weak consultants telling you what you want to hear?

Boards need to be regularly monitoring the strategy of the company against a set of predetermined yardsticks. It should be like a well-run venture-backed company: You don't get your next round of funding until you hit your metrics. Is the board regularly discussing the risks facing the company and are they working on mitigating the risks?

Finally, each director -- no matter how much they like their CEO or other members of the management team -- has to constantly remind themselves that they are the last backstop for shareholders and for other stakeholders. Don't let a stellar career go up in smoke because you didn't ask that extra question. Understand what the company does for customers, and exactly how that translates into profits and shareholder returns. That's one thing that no board member can outsource.

Jackson: Thanks, Syd.

Think Again from Harvard Business Press will be available in February.

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