For detailed discussions of our position on ALL proxy items presented, please see below.
2009 Proxy Items for Bank of America (BAC)
Bank of America (“BAC” or the “Company”) filed its Preliminary Proxy Statement with the Securities and Exchange Commission on March 2, 2009. Below is a list of the proxy proposals set forth on the 2009 Preliminary Proxy, our description and our recommendations on each item.
Please note, we are only stating our opinion on how BAC shareholders should vote their proxy card. We are not soliciting your proxy cards. You should vote your proxy card according to the instructions on the proxy card.
Item 1. Election to the Board of the 18 nominees named in this proxy statement
The Governance Committee of Bank of America has nominated 18 directors to stand for election to serve a one year term as directors. Fifteen of the director candidates currently nominated have served on the board of directors over the last year. One past director, Meredith Spangler, who is a large BAC shareholder and long time director, is not standing for re-election. Three new directors from the Merrill Lynch board that became directors of the Company in January 2009 have also been nominated as director candidates.
Our Philosophy Regarding Directors
We believe that directors have a duty to serve the interests of the shareholders first. Their loyalty should not be divided between management and the shareholders. Their job is to:
- Hire and retain the best and most capable management team available to run the Company;
- Supervise all aspects of the Company’s operations to ensure that those operations are both competitive with peers and also operated in a safe and sound manner that does not expose the Company and its shareholders to undue business risk;
- Oversee and govern management with respect to strategic decisions, including acquisitions. Directors should be aggressive and outspoken to ensure that acquisitions are properly vetted and do not expose the Company and its shareholders to excessive risk; and
- Disclose material information to securities regulators, shareholders and the public in accordance with both applicable securities regulation and their fiduciary duty to shareholders.
Note: We are focused on accountability to shareholders. Our discussion of the directors below is not a personal attack or indictment of anyone’s qualifications, character or reputation. However, we believe that this board collectively failed to function properly as a decision making body that was responsible for protecting the interests of the shareholders of BAC. We would like to change the dynamics of this board so that it functions to protect the interests of shareholders, first and foremost.
It is our strong opinion that the current board of directors has failed in its duties to shareholders. We recommend that you vote against at least three of the directors who have been nominated by the Governance Committee of the Board.
We Recommend a vote Against the Following Three Directors:
- Kenneth Lewis – Chairman & Chief Executive Officer
- Reason #1 – Reckless and Overpriced acquisitions -- as Chairman and CEO, we believe that Mr. Lewis was wrong to encourage the Board of directors to approve (and close) the LaSalle, Countrywide and Merrill Lynch transactions. For a full discussion, click here.
- Reason #2 – Failure to Disclose Material Information - We believe that Mr. Lewis failed to disclose to the shareholders material information regarding the losses that had occurred at Merrill Lynch prior to the December 5th, 2008 shareholder vote related to approving the Merrill Lynch transaction. From press reports, it appears that Bank of America had a full team at Merrill Lynch and was monitoring the Merrill portfolio on a daily basis. Therefore, Ken Lewis and his senior officers were aware of the deterioration in the Merrill portfolio prior to the December 5th shareholder vote.
- Reason #3 – Equivocation on Merrill Bonuses – We believe that Mr. Lewis was aware at all times of the $3.6 billion in controversial bonuses that were to be paid to Merrill employees at a time when Merrill was hemorrhaging money. While we cannot judge from our vantage point whether such bonuses were appropriate or necessary to reward or retain key Merrill employees, we do believe that Ken Lewis’ credibility has been damaged by his initial assertions that he did not know the details of such bonuses. The subpoena of Mr. Lewis by New York Attorney General Cuomo and BAC’s refusal to turn over documents further shrouds the issue and undermines the confidence of employees and investors in Mr. Lewis at a critical moment for the Company.
- Reason #4 – Management of Bonuses for BAC Employees - after richly rewarding their Merrill Lynch counterparts for a job poorly done, Ken Lewis turned around and reduced the bonuses payable to Bank of America employees and then deferred their bonuses over 4 years. This change in compensation to Bank of America employees damaged employee morale, caused defections of key employees and, in our opinion, reduced Ken Lewis’ standing with employees and thus reduced his ability to effectively lead and govern the Company.
- Temple Sloan, Jr. – Lead Director, Chair Compensation Committee, Member Governance Committee
- Reason #1 – Boardroom Governance – As the lead director of the Company, we believe that Mr. Sloan should be responsible for fostering a board environment that is focused on protecting shareholder value and encourages a free discussion of issues, including mergers and other strategic initiatives. The board must be willing to guide and even oppose management if the board believes the course of action proposed could be adverse to shareholders. The board has shown no inclination to do this under Mr. Sloan’s leadership.
- Reason #2 – Failure to Disclose Material Information – As the lead director of the Company, Mr. Sloan was in a position to know that October and November were two of the worst months in Wall Street history for fixed income markets. In addition, it has been widely reported in the press that Bank of America had several of their representatives working in the offices of Merrill Lynch to monitor the trading positions of Merrill Lynch. Therefore, we believe it is safe to assume that Mr. Sloan had direct knowledge, or should have had direct knowledge of the deteriorating financial condition of Merrill Lynch prior to the shareholder vote on December 5, 2008. As lead director and a member of the governance committee of the board, he breached his fiduciary duty to shareholders to inform them of a material change in the financial condition of Merrill Lynch. Further, as we have alleged in our class action lawsuit, we believe that he and his fellow directors violated securities laws by failing to make such disclosures in an amended proxy statement filing before the shareholder vote on December 5, 2008.
- Reason #3 – Failure to Disclose Material Information –Mr. Sloan presided over a board of directors, 17 in all, who failed to disclose material information to shareholders on numerous occasions. Between the Board’s approval to seek $20 Billion of additional TARP funds (plus a $4 Billion insurance backstop) on December 15th (per Company press releases) and January 16, 2009 disclosure of same, we calculated that over 2.7 billion shares or 47% of the time-weighted average shares outstanding traded hands. Would these shareholders have made different decisions to buy or hold given this material information? We believe they would have, and by failing to disclose this information, Mr. Sloan and his fellow directors have exposed the Company to legal liability to those shareholders who purchase common shares during that period of time cited above, in the absence of material information that was withheld by management and the board.
- Jacqueline Ward – Chair Asset Quality Committee
- Reason #1 – Countrywide & Merrill Lynch Transactions – The Asset Quality Committee is responsible for “reviewing asset quality trends and performance” and “reviewing credit concentrations, credit risk inherent in selected products and businesses”. Admittedly, this is quite a tall order. Nonetheless, this committee should have been in a position to advise the other directors of the Company regarding the potential credit risks being assumed in both the Countrywide and Merrill transactions.
- Reason #2 – Failure to Disclose Material Information – As head of the Asset Quality Committee, we believe that Ms. Ward was or certainly should have been in a unique position to alert other board members as well as shareholders about the declining value of securities on the books of Merrill Lynch during the months of October and November prior to the shareholder vote on December 5, 2008. (see reason b. under Temple Sloan)
- Reason # 3 – Membership on Five (5) Major Corporate Boards – Ms. Ward currently serves as a director of five public companies. While we do not question her capabilities overall, we do question how a director can effectively discharge their duty to five public companies. We would further note that Ms. Ward has no apparent direct experience with respect to lending, structured products, credit derivatives or asset backed securities; this is experience that we believe would be helpful in evaluating the credit exposure of Bank of America and Merrill Lynch. We therefore argue that Bank of America is no longer the straightforward commercial banking enterprise that it was when Ms. Ward joined the board in 1994 under former CEO Hugh McColl.
- Other Directors – Review their Positions and Performance - As we have noted elsewhere, our position on directors and management is not intended as a personal attack on any individual. At the same time, we believe that the decision making dynamic that allowed this management team to essentially buy its way into trouble with the LaSalle acquisition, Countrywide acquisition and finally the Merrill Lynch acquisition is fundamentally flawed. There has been a moral failure on the part of this group of individuals to understand that they serve for and at the pleasure of the shareholders, who own the Company. It is to the shareholders that they owe their sole duty of loyalty. Determine for yourself whether committee chairs and committee members were effective in discharging their duty to shareholders.
Three-fourths of Bank of America’s 16 independent directors are not actively involved in business of any kind, and/or simply do not have the in-depth financial or investment knowledge to have insight into the bank’s current problems, or to exercise effective due diligence in the Merrill Lynch merger and integration. The background of these directors encompasses:
- Retired executive of a brewing company (Colbert)
- Retired executive of a property and casualty insurer (Countryman)
- Retired U.S. Army general (Franks)
- Publisher of a Spanish language newspaper (Lozano)
- Retired president of a college (Massey)
- Chairman of an energy utility
- CEO of a non-profit organization dedicated to the media industry (Mitchell)
- Retired U.S. Navy Admiral (Prueher)
- Chairman of a pharmacy and health care services company (Ryan)
- Chairman of an automotive parts distributor (Sloane)
- Retired chairman of a home improvement retailer (Tillman)
- Retired chairman of a telecommunications software company (Ward)
The 16 independent directors on the board combined own little more than 7.5 million out of Bank of America’s 5 billion outstanding shares. This 0.15% ownership of the outstanding shares is too small a stake in the bank’s financial success, and does not exposed directors, individually or as a group, to the massive and permanent destruction of shareholder value that the bank’s sharesholders have suffered. The bank’s CEO is required to hold a minimum of 500,000 shares in the bank, while other executive officers are required to hold at least 155,000 shares. Only 6 independent directors exceed the lower threshold, with the highest shareholding being 310,000 shares.
Did the members of the Asset Quality Committee spot asset quality problems in advance? Did they anticipate potential problems with Merrill Lynch? Did they take precautions to protect the Company from undue credit risk?
How about the Governance Committee members? Did they ensure that the board of directors was properly loyal to the shareholders? Did they ensure that the Company made proper disclosure of material information regarding the financial health of Merrill Lynch? Did they ensure that the Company was clearly in compliance with all securities laws, especially Section 14 (a) of the Exchange Act and SEC Rule 14 (a)-9(a) related to the disclosure requirements for proxy statements issued by the Company? Did they stop the Company from incurring potential liabilities related to the trading of 47% of the total shares outstanding during a period when management and the board withheld material information regarding the financial condition of the Company?
We therefore urge you to examine the background of all directors carefully and review their committee assignments. Ask yourself the following questions:
- Does their professional background indicate that they have expertise that is useful in overseeing the operations and strategic direction of one of the largest and most complex financial institutions in the world?
- In their duties as board and committee members, have they fulfilled their responsibility to the shareholders and the Company? Have they overseen and been responsible for good business and strategic decisions during their tenure?
Item 2. Ratification of independent registered public accounting firm for 2009 – We recommend a vote “For”.
Item 3. An advisory (non-binding) vote approving executive compensation – We recommend a vote “For”.
This proposal has been recommended “For” by the board of directors probably because it is required under the new TARP (American Recovery and Reinvestment Act of 2009) legislation. See page 45 of Preliminary Proxy. In the 2008 proxy, the Board opposed a similar measure put forth by shareholders.
We believe that executive compensation at many U.S. corporations has become disconnected from both performance and rationality. Each board of directors seeks to pays its employees in the top third or top quartile of their respective industry causing an upward spiral in executive compensation. Compensation experts are then retained to provide the board of directors with a study comparing compensation among peer group companies to justify executive compensation levels. American corporate executives and board members are paid like entrepreneurs (or rock stars) for taking managerial risk. We are not opposed to financial gain or the free market system. It makes our country great. However, there are a number of reasons for excessive executive pay, many of them with negative implications:
- Directors have forgotten that they are representatives of the shareholders, and because it is so difficult in our proxy system for ANY shareholder to nominate a director slate, directors understand that in reality they are working for the CEO that nominated them. Until there is Proxy Access allowing shareholders to reassert their true rights to elect directors who serve shareholders, this agency problem will continue to exist;
- As corporations have grown much larger through acquisitions, the amount of pay awarded to the top executives is a relatively small dollar amount relative to revenues or profits or earnings per share, and can therefore be justified as immaterial to the bottom line;
- Institutional shareholders have been derelict in exercising their power to vote their shares and demand that the boards of directors be held accountable for their actions. Many institutions are index type investors, and therefore pay little attention to proxy issues. Traditional investment advisors, either mutual fund managers or separate account managers, are reluctant to challenge any director or management team out of fear they will be seen as disloyal or out of fear they might not have full access to management. So, everyone plays the game and permits corporate malfeasance, albeit on a small scale in the form of excessive pay and perks that continue unabated.
- Individual investors have also been derelict in exercising their power to vote. Owning stock requires some effort and sophistication, and individual investors often fail to take the time to familiarize themselves with the issues. Majority voting and proportional voting have increased the importance of participation by individual investors.
Item 4. Consider a stockholder proposal regarding disclosure of government employment. We recommend a vote “Against”.
We generally prefer to allow the government to handle regulation and disclosure requirements and believe that additional shareholder imposed requirements or constraints will increase operating expenses.
Item 5. Consider a stockholder proposal regarding advisory vote on executive compensation. We recommend a vote “For”.
See our response regarding Item 3. Express your opinion and hold the board accountable.
Item 6. Consider a stockholder proposal regarding cumulative voting. We recommend a vote “For”.
To the extent any proposal can increase the likelihood of shareholders being able to elect someone who would actually represent them rather than management, we must support this proposal.
Item 7. Consider a stockholder proposal regarding special stockholder meetings. We recommend a vote “For”.
This proposal would again increase the ability of shareholders to effect change, and we would therefore support this proposal.
Item 8. Consider a stockholder proposal regarding independent board chairman. We recommend a vote “For”.
This proposal certainly reflects current thinking in corporate governance. We support this proposal because we believe, over the long term, it will reduce the entrenchment of senior management and create a more independent board of directors.
Item 9. Consider a stockholder proposal regarding predatory credit card lending practices. We recommend a vote “Against”.
While we recognize that although some of the loans extended during this credit crisis were the result of predatory lending practices, many were also the result of irresponsible borrowing practices by individuals. While there was clearly a failure in regulatory oversight by the Federal Reserve and state regulators, we believe there will be forthcoming legislation and/or regulation to rein in these practices.
Item 10. Consider a stockholder proposal regarding the adoption of principles for health care reform. We recommend a vote “Against”.
Healthcare is clearly an issue facing our country and all employers. We are not expert in this area. We believe that the competitive marketplace for employees, will force corporations to adopt health plans and medical insurance benefit plan that offer benefits that are comparable with peers to attract the best employees. We believe any shareholder mandated proposal could increase operating expenses.
Item 11. Consider a stockholder proposal regarding limits on executive compensation. We recommend a vote “For”.
We would generally not support this type of proposal as we tend to believe in the free market when setting levels of compensation. Yet, at many American companies there needs to be a recalibration of executive pay to more properly reflects what these executives are being rewarded for. Most of these executives did not start the company, don’t own many shares THAT THEY PAID FOR, or even put much of their own money into the company. They simply work there. And yet, by virtue of a few acquisitions or some peer group study commissioned by the compensation committee, they are being rewarded with outsized compensation. We say enough. Send a message to the board.