Back in the old days, getting board seat on Fortune 500 Corporation conferred stature. Pecuniary considerations were derivative to the prestige and gravitas. There was probably not one line of demarcation, no single landscape-altering volcano, but gradually, incrementally imperceptible, yet inexorably, the genteel retired professor of finance awoke one day and saw that this job, where he might be called upon to exert himself maybe fifteen days per year compensated him $300,000 annually. He got platinum medical insurance, stock options and rides gratis on the company jets. One came to expect at least a couple of all expense paid getaways; I mean meetings at the chicest of resorts.
Theoretically directors are in place to oversee management; to ensure wisdom is employed when making decisions on allocation of hundreds of millions, if not billions of dollars, of shareholder capital. My question is can many of these people, getting paid enormous sums of money in exchange for relatively little expenditure of labor, remain objective in their decisions.
Do directors have the courage to say NO to the CEO who hired them? After all, for a college professor, or retired museum director or non-profit director, an extra $300 to $400,000 every year is the difference between a comfortable retirement and having freedom to travel the world and put some grandkids through college.
One Man Can Do a Lot of Damage
Over a weekend in the fall of 2008 with little due diligence, then Bank of America Chairman and CEO Ken Lewis canvassed his board (often only by phone) for an ill-fated mandate to acquire, for $50 billion, the flailing brokerage house Merrill Lynch & Co. The evidence suggests clearly a reticence by the board members to offer even moderate resistance to a course of action that would ultimately cost shareholders billions in destroyed value.
An even more ludicrous and costly error under the Lewis reign occurred on January 11, 2008 as Bank of America acquired Countrywide Financial Corp. Another company barely surviving on a ventilator, Mr. Lewis needlessly paid $4.4 billion and ominously assumed all egregious Countrywide mortgage malfeasances. Called by U. North Carolina banking Professor Tony Plath, "the worst deal in the history of American finance," by 2012 this transaction had already cost the bank $40 billion.
Both of these abominations were unforced errors. Most major banks and investment banks had scrubbed the books at Countrywide sometimes for many weeks, and this diligence yielded no offers. All sentient beings on Wall Street in September 2008 knew Merrill Lynch was imploding and days away from bankruptcy: they were salivating over picking over the carcass.
Checks and Balances
Was the Bank of America board sleeping during these deliberations that have subsequently cost the bank over $60 billion (and counting) in legal settlements and heavily diluted shareholders? Could these disasters have been averted? Had there been an independent chairman to push back on these mergers, would sounder reasoning have prevailed? Were any board members timorous to speak up and risk the venom of Caesar? Better to go along than lose the lucrative paycheck. The intellectual skillset of the board was more than ample to recognize and object to the folly of these ill-fated moves. When democracy of directors metastasizes and is subverted to an autocracy of one Chairman/CEO, any systemic checks and balances against management poor judgments disintegrate.
In the ensuing bloodbath, in early 2009, shareholders voted to separate the positions of Chairman and Chief Executive Officer. Lewis lost his chairmanship and by the end of the year he was gone from the bank entirely. Though there has not yet been a criminal investigation, Bank of America settled a class action suit which alleged fraud against Lewis and the bank, because prior to a vote on the Merrill Lynch merger, he failed to disclose to shareholders $15 billion in yet to be reported Merrill losses.
Disregard of Shareholders
On October 1, 2014 the Bank of America board unilaterally rescinded the 2009 vote to keep the CEO and Chairman as different people. They did it secretly, like rats scurrying in the night. Current CEO Brian Moynihan now holds both titles. Shareholder pushback has been swift. Glass Lewis and Institutional Shareholder Services, the major proxy advisory services firms, took the unusual step and recommended a vote against the four members of the corporate governance committee: Sharon Allen, Frank Bramble, Thomas May and Lionel Nowell. Despite this, at the May 6 annual shareholder meeting, all of these directors managed to easily retain their positions. The bank has guaranteed there will be revote on the Chairman-CEO issue before the 2016 shareholder meeting.
I want to know why it must be incumbent upon shareholders have to vote again to keep these jobs apart. The right thing is to remove Moynihan as chairman and if the board wants to unify the jobs again, then put it to the shareholders, who own the company. Is it sound corporate governance to autocratically revoke a codified shareholder vote?
Unfortunately, a seat on the board of directors at a major company has alchemized into a coveted prize. It is kind of like gaining entry into an exclusive club; you don't want to do anything to jeopardize your membership. Warren Buffett says if someone on a board votes against proposals, that person would lose influence with fellow directors. "If you keep belching at the dinner table, you'll be eating in the kitchen." He eloquently adds that when choosing board members, "They do not look for Dobermans. They look for Cocker Spaniels, and then they make sure their tails are wagging."
Last year Buffett himself shied away from controversy by not voting against the egregious pay packages that Coke executives bestowed upon themselves. By far the largest Coke shareholder, Buffett abstained claiming he didn't "want to go to war" against management. Finally, Buffett corroborates my thoughts, summarizing the "social dimension" of board membership; "Even 'independent' directors aren't really all that independent because they often want to keep a prestigious job that pays well and has relatively few duties".
Another troubling concern is that directors and management often take little personal financial risk. Thomas May has been a board member for over twenty years, first at Fleet Boston and then with Bank of America after the takeover. Per the 2015 proxy statement, Mr. May currently holds a whopping 2,142 Bank of America common shares. He has 205,173 options but they were given (granted) to him as part of his compensation as director. While these gifts might be worth several million dollars, has Mr. May, and other board members for that matter, ever put any personal money at risk by purchasing stock? I wonder if CEO Brian Moynihan has ever bought one share of stock with his own paycheck? It is a heads I win, tails I don't lose scenario.
Once a member of the "club" it is often a stepping stone to get invited to join others. Lionel Nowell sits on three other boards including Darden Restaurants Inc. and Reynolds American, Inc. So he is what I call a "professional board sitter," probably pulling in close to $1.5 million per year in board fees. Several other Bank of America board members serve on multiple boards. Doing a survey of the top couple of hundred American companies would reveal a cross-pollination of sorts; a board member or two from company A will sit on the board of company B and Company B will have representation at Company A. It ensures a culture of "I scratch your back, and you scratch mine."
It is a system of cronyism that in many ways isn't that much different than third world government. The owners of the company, the shareholders, are often ignored while management enriches itself. The board is the legal cover for the graft. The board controls so many issues like CEO compensation, that any dispersion of power can only benefit shareholders; keeping the CEO and chairman separate is but one small step. Directors also dole out stock options and control corporate governance issues that affect shareholders, like poison pills.
Sadly, we seldom hear of board members standing up and pushing back against management excess. They are harmless Cocker Spaniels, right. Perhaps the trips on the Gulfstream are too powerful a lure. I can only imagine it obscenely difficult to adjust emotionally and suffer the indignity of queuing up for your full body search only to then succumb to the cramped conditions of Delta coach.
Disclosure: I am long Bank of America (BAC) stock