Last week’s decision by Bank of America CEO Ken Lewis to step down at the end of this year apparently caught the B of A board by surprise. It shouldn’t have; the move was long overdue. Lewis’ ability to lead B of A has been irretrievably compromised and stepping down was the only sensible move.
Lewis is being investigated by Congress and regulators about his involvement in the decision last December not to disclose to B of A shareholders voting on B of A’s acquisition of Merrill Lynch the fact that Merrill employees were slated to receive billions of dollars in bonuses despite the company’s dismal performance in 2008. A trial date of February 1 has been set in an SEC enforcement action alleging that this failure to disclose constituted federal securities fraud; the action’s settlement was rejected by a federal district judge last month as too soft. There are also questions surrounding when Lewis and others at B of A became aware of massive losses Merrill had sustained but not yet disclosed as 2008 drew to an end.
Lewis’ announcement has prompted some hand wringing by those who believe that he has become a scapegoat for public anger about the financial crisis and that he was no worse than other financial firms’ CEOs who have not had to endure as much scrutiny. Those arguments are unpersuasive. Lewis expanded B of A via numerous acquisitions during his tenure, and he seemed to let his enthusiasm for doing one more big deal blind him to the perils of the Merrill acquisition. Lewis’ demeanor often makes him appear defiant rather than contrite, which may be useful when negotiating deals but can be downright hazardous when facing members of Congress. And his claim that he completed the Merrill acquisition because of pressure from regulators and a threat to remove him as CEO if the deal did not close paints him as all-too-willing to sacrifice the interests of B of A shareholders to benefit himself.
More important than Lewis’ own personal shortcomings, however, is the basic principle of accountability: As CEO, Ken Lewis must be accountable for what B of A does. I don’t mean this in the sense of legal accountability—he may or may not have committed fraud under the various legal definitions that might apply to his conduct. Instead, as a leader, Ken Lewis must take responsibility for actions taken by B of A, even those he did not order or condone. He should also be accountable for B of A’s financial performance: The price of its stock has underperformed those of its industry peers as well as the S&P 500 over the one-, three- and five-year periods ending June 30, 2009, according to quarterly data from Morningstar. Lewis’ resignation, albeit late in the game, is a gesture in this direction.
The flipside of Lewis’ accountability—and another reason no one should be feeling terrible for him--is that he has been paid lavishly. A CEO’s job is risky: average tenure among S&P 500 CEOs is only about six years, and median tenure is four years. For that reason, CEOs are well-paid for their labors. In addition to a $1.5 million yearly salary, Lewis received cash bonuses in 2003 through 2007 totaling over $27 million. In 2006 alone, he made over $77 million in profit exercising stock options. He will leave B of A with a pension worth over $53 million and deferred compensation of $10.6 million, according to B of A’s latest proxy statement.
Finally, the inability of the board to name a successor to Lewis following last week’s announcement—the Wall Street Journal has reported that an “emergency” CEO will be appointed to take the reins if Lewis has to depart before year-end—is an embarrassment. We have long been critical of the performance of B of A’s board, especially in the compensation area. Following messy CEO transitions at Citigroup and Merrill, it would have made sense for B of A’s board to attend to succession planning. But despite the pressures on Lewis and his forced relinquishment of the board chairmanship this past spring, B of A’s board was caught flat-footed by his resignation. B of A’s shareholders, and indeed all of its constituencies, deserve better.
Beth Young — Senior Research Associate
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