Commentary: Memo To Bof A's Mc Call: To Give Back Is Divine
Bank of America Chief Executive Hugh L. McColl Jr. has thrown in the towel. The notoriously stubborn 65-year-old ex-Marine said last month he will step down in April, despite previous vows to stay on until 2002. McColl's departure will leave the bank with a raft of problems that started on his watch: poor loan quality, falling market share, and slowing capital markets activity.
If he wants to exit gracefully, McColl might want to make a parting gesture to shareholders--by giving back a chunk of a 1999 bonus. It wouldn't be the first time that a CEO has returned cash after his company's performance sagged. In 1998, Lawrence M. Coss, then boss of mobile-home manufacturer Green Tree Financial Corp., refunded $23 million of his $102 million 1996 paycheck after Green Tree took nearly $400 million in pretax charges and restated its 1996 results. Already this year, Charles Schwab co-CEOs David S. Pottruck and Charles Schwab halved their January and February take-home pay as earnings fell.
McColl's big payday came in July, 1999, when the bank's board awarded him stock worth $44.7 million as a one-time bonus for creating "the largest nationwide bank in the United States." McColl, after all, had masterminded the merger of his Charlotte (N.C.)-based NationsBank Corp. and San Francisco's BankAmerica the previous year. At the time of the bonus award, the merged company's stock was trading at $74.50 a share--a level it has never reached since.
CRACKS. Shareholders weren't told about the bonus until eight months later, when the bank published its proxy statement. Attendees questioned both the size and the merits of McColl's bonus at the bank's shareholder meeting last April. But Solomon D. Trujillo, chairman of the board's compensation committee, stoutly defended the payout. McColl, he said, deserved the bonus because he had been "undercompensated" in previous years. McColl's salary and bonus, had, in fact, been slightly lower than CEOs of comparable-sized banks in 1998 and 1997.
Given the post-merger destruction of shareholders' equity, though, there's no justification for an award that was more than 20 times his 1999 salary. Just compare McColl's deal with the Citibank and Travelers Group Inc. merger, announced the same week. At the time, the two combined entities were within $20 billion of each other in market capitalization. Two years later, Citigroup is worth more than $200 billion, vs. a little more than $80 billion for Bank of America, which is now worth less than regional bank Wells Fargo & Co. Bank of America declined to comment.
Still, Trujillo's arguments were hard to counter at the shareholders' meeting: Bank of America had just reported first-quarter net income of $2.24 billion, up 17% from a year earlier. Even then, however, cracks had started to appear in the the picture management was painting. High-level executives from San Francisco had defected, apparently because they were unable to work with the prickly McColl, and BofA's investment bank, Montgomery Securities Inc., was no longer a top-tier player. Meanwhile, nonperforming assets were slowly ratcheting up.
Within a few months, the situation worsened considerably. After initially hitting Wall Street earnings estimates for the third quarter, the bank said in a November filing with the Securities & Exchange Commission that problem loans were rising. On Dec. 6, the bank announced it would take a $1.2 billion charge for bad loans, miss 2000 earnings, and earn 30% less in 2001 than McColl projected when the banks merged.
Since Dec. 6, Bank of America's stock has gained 40% and is trading above $50 a share. But it's still well below the price when McColl was handed his bonus, and it could weaken again: On Feb. 6, UBS Warburg analyst Diane B. Glossman downgraded Bank of America from "buy" to "hold," saying "earnings risks still exist."
McColl should make a move before the bank's 2000 proxy appears in March. After all, Bank of America shareholders deserve some good news for a change.