The Corporate Library Blog

New Chair at Bank of America

Bank of America’s board named a new Chairman this week – former du Pont Chairman and CEO, Charles O. Holliday Jr. Of course, the roles of CEO and Chair of the Board have been separated at Bank of America since shortly after last year’s annual meeting where shareholders loudly voiced their opinion on the issue.  In this year’s proxy statement (filed March 17, 2010), the company let us know that a new person would be named Chair in the section addressing the SEC’s new disclosure requirements regarding Board Leadership:

“...we have an independent Chairman of the Board. The current structure is appropriate in response to our stockholders vote in April 2009 to approve a Bylaw amendment providing for an independent Chairman of the Board.  After that, the Board, upon the recommendation of the Corporate Governance Committee, appointed independent director Dr. Massey to serve as the Chairman of the Board. Following the Annual Meeting, the Board will, upon the recommendation of the Corporate Governance Committee, appoint an independent Chairman of the Board for the 2010 to 2011 term.”

While some may be concerned that Mr. Holliday does not have a background in the financial services industry, we are not concerned about this because the Board Chair should be more focused on managing and activating the board to guide and monitor management, rather than managing the business. As Bank of America’s Board Chair, he is responsible for ensuring that the board includes people with the appropriate backgrounds - including financial services - but does not need to have industry-specific background himself. More important is the broader experience (e.g., strategic planning at a large company) and leadership style he brings to the board. According to a Wall Street Journal article, Mr. Holliday urged “Mr. Moynihan not to accept a seat on another company's board while he is adjusting to the CEO duties at Bank of America, said one person familiar with the matter.” However, we do find some irony in that statement, because Mr. Holliday is adding his role as Chair of the Bank of America board to his role as Presiding Director at Deere and Company. While this role will surely provide him valuable experience in leading a board as a non-executive director, one wonders how much time he can devote to each role, especially if a crisis or major strategic need were to arise at both companies simultaneously.

Annalisa Barrett - Senior Research Associate

Here's Your Chance to Question Wall Street CEOs

The Financial Crisis Inquiry Commission headed by Phil Angelides will hold its first substantive hearing next week and Commissioner Keith Hennessey has asked for suggestions on what questions to put to the four Wall Street CEOswho are scheduled to appear:

• Lloyd Blankfein of Goldman Sachs;
• Jamie Dimon of JPMorgan Chase;
• John Mack of Morgan Stanley; and
• Brian Moynihan of Bank of America.

Hennessey, former senior White House economic adviser to President George W. Bush, encourages anyone to send suggested questions via email or comment on his blog.  It is a great opportunity to crowd-source the hearing and allow Main Street to present their concerns directly to the Wall Street.  This selection from the invitation letter sets the framework of the hearing:

The FCIC is interested in learning what caused financial problems experienced by your company, including losses incurred, and what changes have been implemented as a result. Therefore, your testimony should address the following topics:

• What were the primary errors and business practices that caused the financial problems at your company and what actions have been taken to address them;
• What were your company’s business models and major sources of income (or loss), what changes have been made, what were the reasons for the changes, and what are your company’s current business models and sources of profit;
• What types of lending activities did your company pursue that caused the financial problems, including the amount, Iypes and terms of loans being made, what changes have been made, what were the reasons for the changes, and what are your company’s current lending practices;
• What were the risk management policies and practices at your company, including the types of investments being made, underwriting and approval of investments including reliance on third parties for due diligence, monitoring of investments by management, the board of directors, committees of the board of directors, and any other persons or entities, and the accounting and public reporting of the company’s investments. What changes have been made to your company’s risk management policies and practices, what were the reasons for the changes, and what are your company’s current risk management policies and practices. In addition, what were your company’s risk exposure, what changes have been made to your company’s risk exposure, what were the reasons for the changes and what are your company’s current risk exposure;
• What were the executive compensation plans and practices at your company and how did they contribute to the problems. What changes have been made to your company’s executive compensation plans and practices, what are the current executive compensation plans and practices, and what were the reasons for the changes.

Nell Minow - Editor

Don't Cry For Ken Lewis

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

Trust banks! And no, I don't mean that nicely.

I mean trust banks to come up with a way around the pay caps as quickly as possible.

We already wrote about pay hikes at Morgan Stanley and Citigroup. But they were nothing to Wells Fargo’s little ruse revealed last week. A five hundred and twenty-two percent salary increase for the CEO, from $900,000 to $5,600,000 no less. But let’s pay it in stock so it’ll look good!

That didn’t fool anyone, not even for a nano second. Who do they think we are? Unsophisticated investors who can’t make informed decisions about Say on Pay votes?!

Three other senior execs at the bank also got similar pay rises… in stock… so you can bet your life that these are only the ones they were forced to tell us about and that there is a rash of it going on all through the organization. Check out the filing. They don’t even try to disguise it.

So, this stock thing? Why isn’t that a good thing?

Well, if you do a little stock research, that becomes clear too. Because the bank’s stock price used to be up in the $40s and now it’s down in the $20s and if taxpayer loans can help get it back up there, guess who makes out?

This is better known as a GUARANTEED BONUS, which our very own Nell Minow is fond of referring to as the biggest oxymoron in the world, and a subject that my old mate Eric Dash has recently been writing about in the New York Times. Everyone’s doing it. Citigroup, Bank of America, GMAC, Morgan Stanley, even AIG!

What they are doing is poaching. Poaching other banks' employees with offers of guaranteed bonuses. And everyone is poaching off everyone else, seemingly. Bank of America from Morgan Stanley and Morgan Stanley back off Bank of America and so on. Can’t they all just stay put and then the Treasury can have its money back? I mean, it’s not a strategy that even works. So-called star performers falter and peter out, turning into black holes, according to a BNET blog by Jeffrey Pfeffer, which quotes research from a Harvard Business School professor, Boris Groysberg. This research shows that if a “star trader” is headhunted, their performance suffers, and not just in the first year but over time as well, and the performance of the firm that did the headhunting also falters. No wonder they want guaranteed bonuses!

Distressingly enough, according to Eric, even Credit Suisse is doling out guaranteed bonuses. Credit Suisse! That seemed to be everyone’s white knight last week when Aaron Lucchetti (who was the first journalist ever to call me for comment in the U.S. incidentally) wrote about their toxic bonus plan in the Wall Street Journal. How that works is that some of the bankers get paid with shares in the toxic assets. Make money on those, and you get paid. Don’t, and you don’t. Now that’s what I call socially responsible investing. Simple enough and an utterly appropriate use of compensation strategy. So why do one thing smart and another dumb. Toxic asset bonuses/guaranteed bonuses. Right/wrong.

We can tell the difference.

And I’m pretty sure Mr. “Pay Czar” Feinberg can too.

Paul Hodgson — Senior Research Associate

Bank Bonus: Heads I win, Tails You Lose

What am I talking about? Surprised that they’ve returned so soon to the bad old ways of short-term bonuses? They never even stopped.

Using powers unavailable to mere researchers, Andrew Cuomo, NYC’s Attorney General has forced the banks to fess up what they did on bonuses last year. Yes, LAST year. AS they were driving the rest of the economy down the pipe. AND as they were asking the government for money – or being forced to accept it.

No Rhyme or Reason – The ‘Heads I win, Tails You Lose’ Bank Bonus Culture (see, you don’t even have to make this up!) is a 22 page report that concludes after months of investigation:

Thus, when the banks did well, their employees were paid well. When the banks did poorly, their employees were paid well. And when the banks did very poorly, they were bailed out by taxpayers and their employees were still paid well.

The report lists banks paying out more in bonuses than they received in income (Goldman, Morgan Stanley, J.P. Morgan Chase), in some cases with half the TARP funding being paid out in bonuses. Others paid out billions in bonuses while seeing a loss (Citigroup and Merrill Lynch). Bank of America and Citigroup saw performance crippled in 2008, yet compensation expenses stayed at EXACTLY the same level as they had in 2007, one of the best bull years.

O.K. O.K. I’m sorry about all the capital letters, but really, I’m surprised this whole report isn’t printed in UPPER CASE. It’s certainly well calculated to make the blood of any shareholder (or Congressman) boil.

The usual excuses for this kind of behavior are offered, in this case by Merrill Lynch executives, that employees in units that performed well should not suffer because of the huge losses engendered by other less successful units.

But somewhere along the line the overall financial health of the whole firm must be taken into account (phew, got through that sentence without any upper case at all).

Johnny and Jane’s allowances
Let’s try and liken this to family finances to try and bring it down to the level of common sense and reality, rather than the fantasy and lunacy that reigns on Wall Street and in the other banks.

Mom and Dad bring in a good pay packet each week. Johnny and Jane have their list of chores and get their allowances for doing them each week. Let’s see food and lodging as base salary and allowances as bonuses. But then Dad loses his job, has to stay home, and takes over Johnny and Jane’s chores during the week, when they are at school. The dishwasher continues to get stacked, the laundry done, the lawn mowed, the trash put out. Johnny and Jane aren’t doing the chores any more, and the family income is halved so their allowances are cancelled. Fair enough. But then Dad starts going out looking for other work and has to attend interviews, he’s away most of the time, or at home writing applications, working on his resume. Johnny and Jane have to take up the chores again. But do they get their allowances back?

Yeah.

When Dad gets another job.

That’s how real people live.

Let’s push it a step further. There are bills to pay, right? Like debt, like “dividends to shareholders”, what is Mom going to do? Tell the utility company that she can’t afford to pay the electricity bill because Johnny and Jane need their allowances? Tell the bank that she can’t pay the mortgage because Johnny and Jane need their allowances or they’ll GO AND DO THE NEIGHBOR’S CHORES INSTEAD AND GET PAID BY THEM!? That’s a sure fire way to get your house repossessed.

And what if they had mortgage insurance? That’s like Treasury money, yes? But she used it to pay Johnny and Jane their allowances rather than using it to pay the mortgage? Someone’s going to get mad.

If they haven’t already.

Paul Hodgson — Senior Research Associate

 

Say on Pay: The ayes have

In the May 2009 issue of Governance, the leading international monthly newsletter on issues of corporate governance, boardroom performance and shareholder activism, Senior Analyst Paul Hodgson looks at the differences between the UK and the US in the say-on-pay debate.

"The most recent votes on executive remuneration show a marked difference between the UK and the US. ‘No’ votes at RBS and Shell versus ‘yes’ votes at Verizon and Bank of America? In the US it would certainly seem that the ‘ayes’ have it.

Admittedly, RBS’s current woes are significant. And Shell’s decision to pay out its performance shares even though the company didn’t hit the targets it had set itself is not one to garner much support. So perhaps it is no surprise that shareholders revolted there. But with all the talk of pitchforks, torches, and angry mobs on Wall Street, what happened at Verizon, where the pay package received a 90 per cent shareholder support at a company that is hardly the doyen of remuneration best practice? And Bank of America, where support topped 70 per cent? Surely the Merrill Lynch bonus fiasco would have been enough to provoke some protest. Higher
still, Goldman Sachs’ remuneration plan received a 98 per cent support rate, perhaps because total remuneration dropped from more than $70m to a ‘mere’ $26m. And around 85 per cent of Citigroup’s shareholders backed its pay proposal even though the company’s CEO and chairman were hauled in front of a congressional committee earlier this year to answer questions about their involvement in the financial crisis.

Why is the furore over pay so much louder in the UK than it is in the US at the moment? Perhaps with six years of voting on executive remuneration under their belt, UK shareholders felt it was time to exercise their rights in larger numbers, while in the US shareholders are so surprised at having the right in the first
place that they don’t seem quite to know what to do with it.

So where is the US with ‘Say-on-Pay’, the name given to the campaign to have a non-binding management proposal to approve executive remuneration on the agenda at every company’s annual general meeting?

Management proposals to approve pay
During the 2008 proxy season, only two companies subjected themselves to a shareholder vote on pay, insurance company Aflac and risk management firm RiskMetrics, both voluntarily. Both had their executive remuneration packages overwhelmingly supported by shareholders.

Until March this year, that figure of two was going to be swelled to around ten, with further companies reacting to shareholder pressure to add the vote to their proxy ballots. But then in March the Securities and Exchange Commission (SEC) reacted to legislation in the American Recovery and Reinvestment Act
(ARRA) that would require all companies receiving funds from the US Treasury to place a say on pay vote on their ballot, confirming that roughly 400 additional companies – mostly financial –would have to have such a vote. This rule applied to all proxy statements filed after 17 February 2009.

Shareholder proposals
Say-on-pay has been the subject of more than 200 shareholder proposals over the three proxy seasons 2007–2009, with support for such proposals waxing and waning. Some companies, like Apple and Motorola, have reacted to majority support for such resolutions by introducing or promising to introduce a say on pay
vote. Others, such as Ingersoll-Rand, have ignored the majority of their shareholders and made no such moves.

But the various legislative acts appear to have taken the wind out of the sails of the shareholder campaign, with support levels for shareholder say-on-pay proposals in the current proxy season remaining on average at the 40 per cent level seen in 2007 and 2008.

Legislative change
For the present, only TARP companies (those companies that received financial assistance from the Troubled Asset Relief Program fund) must propose a vote, and then only during the period when they are in receipt of Treasury funds. But this may soon change.

A bill put forward by Senator Charles Schumer – the Shareholder Bill of Rights Act of 2009 – includes say on pay among a larger set of governance proposals. Support for the idea from the current administration is clear, as President Obama had already sponsored a say on pay bill while he was a senator during 2008.
If the Shareholder Bill of Rights Act were to be signed into law then say on pay would become a universal requirement for all listed companies."

Paul Hodgson — Senior Research Associate

Mozilo & the Countrywide Board of Directors: The Devil Wears Gucci

As reported this afternoon on the Dealbreaker blog, the SEC has officially charged  Angelo Mozilo, the former Countrywide Financial CEO, with insider trading.

It was on October 8, 2005, at the Waldorf-Astoria Hotel’s Grand Ballroom in New York City, that one Angelo Mozilo, of California, holder of raffle ticket number 271 in the Columbus Citizens Foundation’s Gala Dinner, for which he paid $1,000, was awarded the top prize of the evening: a $170,000 yellow Lamborghini Gallardo sports car.

Though the Gallardo is easily Lamborghini’s most popular model, fewer than 2,000 Gallardos are made each year. It was, in short, the perfect prize for a man who already had everything, including, it is said, a gold Rolls Royce.

Angelo Mozillo is a man with the Midas touch. He built Countrywide Financial Corporation into the nation’s largest and most successful mortgage company, and himself into one of the nation’s most successful and widely-respected CEO/Chairmen. His story, and the story of the company he founded, is the American Dream writ large. It is also an American Tragedy, with tragic flaws to spare and with Countrywide’s former directors acting more like stage sets than a mindful chorus.

Now reduced mainly to a significant liability on the Bank of America balance sheet, the last traces of the Countrywide trademark are being steadily wiped clean, and Mozilo himself appears likely to face charges of fraud and other civil violations by the US Securities and Exchange Commission.

The irony of this tale is that it might never have gone sour for Mozilo personally had he only retired as planned, back in December, 2006, when Countrywide was still the very essence of success and vitality. According to testimony by the then-chair of the Countrywide Compensation Committee and the company’s most recent Lead Director, Harley Snyder, "It turned out that during that year, the individual we thought would succeed Mr. Mozilo as CEO had left the company,” which then led the board to retain Mr. Mozilo "as CEO for an additional three-year term."

In negotiating a new contract with Mozilo, however, the Committee appears to have ignored the advice of two prior Countrywide comp consultants, Pearl Meyer and Ross Zimmerman of Exequity, in favor of the recommendations of John England of Towers Perrin, tapped originally by Mozilo himself. In England’s own words, from an email directed at Mozilo, the final terms of the new contract represented a “significant enhancement from what Zimmerman had the first time around.”

Mozilo’s response, almost certainly reflective of the attitude of many other top American CEOs of that period, made clear his belief that boards were unwisely limiting CEO compensation due to political pressures. As he rather vividly put it, “Boards have been placed under enormous pressure by the left-wing anti-business press and the envious leaders of unions and other so-called CEO Comp Watchers, and therefore Boards are being forced to protect themselves irrespective of the potential negative long-term impact on public companies.”

The Corporate Library downgraded its rating on Countrywide from an overall C to an overall D on January 2, 2005, in direct reaction to the Countrywide board’s capitulation to Mozilo’s new contractual demands. We further downgraded Countrywide to an overall F on August 19, 2005, based on the board’s inability to bring the company’s internal controls into compliance with Section 404 of Sarbanes Oxley.

We reviewed these downgrades and the compensation factors we found to be most problematic in a previous Analyst Alert issued in September, 2007: Download Analyst Alert.  But in general our reasons were exactly the opposite of those cited by Mr. Mozilo: we felt that the Countrywide board had failed to provide proper oversight for Mr. Mozilo’s compensation and other terms of employment, demonstrating a short-term focus at the expense of the company’s long-term prospects.  We saw these actions as clear indicator of governance risk.

The story of Countrywide’s subsequent decline and ultimate demise is well known, but what of the individual directors who served on the Countrywide board in those last two or three critical years? How have they fared since the company’s acquisition by Bank of America?

One place you won’t find them is on the board of Bank of America, unlike several of the directors of other past BofA acquisitions such as MBNA and FleetBoston.

But four remain in active service on the boards of one or more public corporations, and two now serve together on the same board.  These four individuals are:

• Michael E. Dougherty, who joined the Countrywide board in 1998. In 2006-07 he served as Lead Director, Chairman of the Corporate Governance & Nominating Committee, and as a member of the Compensation Committee. Mr. Dougherty is the founder and Chairman of Dougherty Financial Group LLC, which was formed in 1977. Mr. Dougherty currently sits on the board of directors at the Forestar Group, a real estate and other asset management company, where he is a member of the Corporate Governance and Nominating Committee.

• Kathleen Brown, who joined the Countrywide board in 2005, and departed in 2007. In 2006-07 she served as a member of the Credit and Finance Committees. Ms. Brown currently sits on the board of directors at the Forestar Group, a real estate and other asset management company, where she is a member of the Audit and Management Development & Executive Compensation Committees.

• Robert T. Parry, who joined the Countrywide board in 2004. In 2006-07 he served as Chairman of the Operations & Public Policy Committee and as a member of the Audit & Ethics and Credit Committees. Mr. Parry is the retired President and Chief Executive Officer, effective May 2004, of the Federal Reserve Bank of San Francisco. He had served in such capacity since February 1986. Mr. Parry is a director and member of the Executive Committee of the San Francisco Bay Area Council of the Boy Scouts of America. He has also served on the board of directors of the National Bureau of Economic Research and Countrywide Bank, FSB. Mr. Parry is currently serving on the boards of directors of Janus Capital Group, Inc., where he is Chairman of the Corporate Governance & Nominating Committee and a member and designated financial expert of the Audit Committee, and also the board of directors of PACCAR, Inc., where he is a member of the Compensation Committee.

• Keith P. Russell, who joined the Countrywide board in 2003. In 2006-07 he served as Chairman of the Credit Committee and as a member of the Audit & Ethics and Finance Committees. Mr. Russell currently serves on the board of directors of Nationwide Health Properties, where he is the Chairman and designated financial expert of the Audit Committee and a member of the Corporate Governance & Nominating Committee, and Sunstone Hotel Investors, Inc., where he is a member and designated financial expert of the Audit Committee and a member of the Compensation Committee.

The remaining former members of the Countrywide board have all retired from active service on the boards of public corporations, though most continue to serve on various private and non-profit boards.

The circumstances of Countrywide’s precipitous decline are also by now well documented, but a few key questions will always remain for those who try to understand the role of boards and corporate governance in such situations. How could such a talented and experienced board have failed so badly? Would things have turned out differently had the board either decided not to re-hire Mozilo in the first place, or at the very least refused to meet his new contractual demands? The forced departure of Hank Greenberg at AIG doesn’t appear to have made any difference with regard to the ultimate outcome for AIG – would things have been different at Countrywide absent Mr. Mozilo?

We may never know the answers to all these questions, but we can say with certainty that key signs of significantly increased governance risk were clearly visible at Countrywide as early as 2005, when we first downgraded the company, and that investors and D&O insurers who followed The Corporate Library’s governance risk ratings would have avoided altogether the tremendous losses that were to come.

Ric Marshall — Chief Analyst