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Brian Moynihan Gets to Keep Both of His Jobs

Matt Levine is a Bloomberg View columnist. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz and a clerk for the U.S. Court of Appeals for the Third Circuit.
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Here's kind of a weird claim about Tuesday morning's Bank of America shareholder vote:

"Anything less than a 70 percent support level is really going to demand questions of this board," Michael Pryce-Jones, corporate-governance director at CtW Investment Group, said in a Bloomberg TV interview before the meeting. 

The story here is that Bank of America's shareholders had previously voted for a binding bylaw requiring Bank of America to have an independent board chairman separate from its chief executive officer. And then after a while, Bank of America's board decided, you know what, never mind, we'll just make Brian Moynihan chairman and CEO, and it changed the bylaws to get rid of the independent-chairman requirement. And then shareholders complained, and so Bank of America announced that it would hold a not-quite-binding vote to "ratify" the new bylaws.  The board and management argued strenuously that the shareholders should ratify the bylaws and let Moynihan keep both jobs, and on Tuesday shareholders agreed, though by a small enough margin -- "Approximately 63 percent of shares voted were cast in favor of the proposal" -- that Michael Pryce-Jones won't stop demanding questions.

And that's his right, but the key thing to remember is that the last time Bank of America did this, it was a binding vote on whether to separate the chairman and CEO, and the board argued for keeping those roles together, and the board got less than 50 percent of the vote for its position. And I don't want to say that that didn't matter, exactly -- Bank of America really did pick an independent chairman, and had one for five years -- but it didn't really matter. The shareholders changed the bylaws, but the board could change them right back, and it eventually did. (Both the shareholders and the board have the right to change the bylaws, but the shareholders usually meet only once a year, while the board can meet whenever it wants, giving it a big advantage.  The shareholders can change the bylaws, but then the board can change them back the next day, and the shareholders have to wait a year to change them again. )

Obviously, if the board did that, shareholders would get mad, but then what? They could vote against the directors at the next annual meeting. Bank of America's bylaws require directors to get a majority of votes cast.  But if one doesn't -- if more shares are voted against a director than for him -- then he doesn't just slink off in disgrace. Instead, "our Board, with the assistance of our Corporate Governance Committee, will consider whether to accept the director's offer of resignation which is tendered under our Corporate Governance Guidelines and will publicly disclose its decision within 90 days." So if shareholders vote to kick out a director, the result is ... nonbinding. The result is that the other directors get to consider whether to actually kick him out.  And even if they do, that creates a vacancy, which can then be filled by the board of directors.

The point here is that:

  1. The board can do whatever it wants, and
  2. If shareholders don't like it, their recourse is mostly limited to going on television and saying hurtful things about the board.

Shareholder democracy here is largely symbolic and vestigial: Boards try to mostly sort of do what shareholders want, because it looks bad not to, and because people are basically decent and prefer to avoid conflict and don't like hearing hurtful things said about them on television. But if boards really don't want to do what the shareholders want, they don't have to. It's impolite, perhaps, but there's not much the shareholders can do about it.

I mean! Classically, there are two things the shareholders can do about it. One thing they can do is sell their stock, which serves the twin purposes of (1) allowing them to stop worrying about what's going on at Bank of America and (2) punishing Bank of America's executives for their sins by lowering the stock price and, thus, the executives' net worth. (If they own a lot of the stock.) This can be a somewhat unsatisfying result, though: What if you think that Bank of America is a good (or at least underpriced) business, but you're mad at the directors for slighting you? Selling the stock in that situation feels more like punishing yourself than punishing them.

The other thing shareholders can do is mount a proxy fight and really throw out the directors: If a competing candidate gets more votes than the board's candidate, there is no game of nonbinding resignations. The winner takes the job, and the loser leaves. This happens sometimes! Frequently it happens in the context of hostile acquisitions. An acquirer comes in to try to buy the company, is rebuffed by the board, and mounts a takeover attempt via proxy fight. The theory is that the possibility of a hostile takeover is what forces managers and directors to pay attention to shareholders. If the shareholders are disgruntled -- perhaps because the board keeps ignoring their nonbinding votes -- then the stock price will go down, the company will be attractive to acquirers, and the shareholders will vote for a sale because it's better than the incumbent management. But this theory doesn't particularly apply to a giant bank. Who would acquire Bank of America? Who would have the money? Why would a regulator let them? 

Proxy fights sometimes happen without hostile takeovers, but again it seems unlikely for a bank. When hedge fund Starboard Value was unhappy with Darden Restaurants, which owns Olive Garden, it mounted a proxy fight, and won, and replaced Darden's board and management, and literally went to work waiting tables at Olive Garden. But that is Olive Garden. Starboard owned about 8.8 percent of the company, worth about $573 million at the time of the shareholder vote. It would cost about $14 billion to buy the same percentage of Bank of America. Proxy fights are expensive, and a shareholder with a big concentrated stake in a medium-sized company has a lot of incentives to run a proxy fight and try to change it.  But it's harder to build a big concentrated stake in a giant company. 

And Bank of America isn't just a big company; it's a bank. If you replace the board and management of Olive Garden overnight, it will more or less keep functioning. Maybe the pasta water will get a bit saltier, maybe the bread sticks will come out a bit slower, but it would take a while to break Olive Garden. You could break Bank of America in 10 minutes. A big universal bank is a collection of massive terrifying forces that have been carefully balanced against each other so that no one of them overwhelms the others and washes the bank away. If someone goes out for a smoke at the wrong time, the whole system could come crashing down. Firing all the directors and senior managers at once is just not on. Regulators would not like it, and no responsible shareholder would vote for it.

The market for corporate control provides the coercive backdrop to all the nonbinding shareholder votes at most normal companies. But that market doesn't quite function for big banks. There is a sense in which that is fine. Big banks should be less answerable to their shareholders than other companies are. Banks are sort of a public trust, and can't be run entirely for the benefit of shareholders. They use a lot of borrowed money  and impose a lot of systemic-risk externalities and are subject to a lot of regulations. The things that shareholders stereotypically want -- increased leverage, share buybacks, more risk-taking -- are exactly the things that banks aren't supposed to give them. Of course shareholder democracy is weaker for the banks than it is for regular companies. And while bank managers might be less constrained by shareholders, they are more constrained by regulators, so it's not like they can do whatever they want without any supervision.  But sometimes they can ignore shareholders and the shareholders can't do much about it, and that hurts.

  1. Here's the proxy statement. The shareholders were voting on a resolution saying: "Resolved, that the Bank of America Corporation stockholders hereby ratify the October 1, 2014 amendments to the company’s Bylaws that permit the company’s Board of Directors the discretion to determine the Board’s leadership structure, including appointing an independent Chairman, or appointing a Lead Independent Director when the Chairman is not an independent director."

    That expression of approval has no legally binding effect, but the proxy also says that "The Board is committed to act in accordance with the vote results of the Proposal" and that "If the company’s stockholders do not approve the Proposal at the Special Meeting, the Board intends to promptly implement a plan to transition from the current Board leadership structure to an independent Chairman structure, including to amend the company’s Bylaws to repeal the Bylaw Amendment and to revise the Corporate Governance Guidelines accordingly." So that sounds sort like the board would bind itself to the results, though you never know.

  2. See pages 52-53 of the 2009 proxy statement, which is perhaps more perfunctory than the 2015 argument but hits many of the same points.

  3. See Section 7 of Bank of America's certificate of incorporation ("In furtherance and not in limitation of the powers conferred by law, the Board of Directors of the Corporation is expressly authorized and empowered to make, alter and repeal the Bylaws of the Corporation by a majority vote at any regular or special meeting of the Board of Directors or by written consent, subject to the power of the stockholders of the Corporation to alter or repeal any Bylaws made by the Board of Directors.") and Section 109(a) of the Delaware General Corporation Law ("the power to adopt, amend or repeal bylaws shall be in the stockholders entitled to vote, or, in the case of a nonstock corporation, in its members entitled to vote; provided, however, any corporation may, in its certificate of incorporation, confer the power to adopt, amend or repeal bylaws upon the directors or, in the case of a nonstock corporation, upon its governing body by whatever name designated.").

    I should add that Tuesday's meeting was a special meeting, so a bit of an exception to the general rule that the shareholders usually meet just once a year.

    Obviously "meet" is largely metaphorical; the shareholders mostly have their brokers send in proxies electronically.

  4. Or call a special meeting, which is hard, not least because Bank of America's bylaws themselves (article III, section 2) limit the shareholders' ability to call a special meeting.

  5. See article III, section 10. Of course, the board could change that bylaw, too!

  6. I have no idea what happens if none of the directors get a majority. Presumably they wouldn't all accept each others' resignations. 

  7. Article IV, section 4.

  8. I guess "sue" is a third thing, but it is sort of demoralizing so I will just leave it here. 

  9. I've mentioned this before, but here is a fascinating paper on activism that discusses the costs (and payoffs) of proxy fights. One surprising (to me) finding is "that campaign success is independent of stake size," though that is not the same as the probability of a campaign being independent of stake size.

  10. Also, it is not obvious that shareholders are even the residual claimants on banks' cash flows.

  11. Though if you were a financial regulator, wouldn't you want big banks to separate the chairman and CEO roles? I kind of don't understand why there's no concerted regulatory push for this. Perhaps the regulators just find Moynihan and Jamie Dimon too charming to want to demote them.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Matt Levine at mlevine51@bloomberg.net

To contact the editor responsible for this story:
Tracy Walsh at twalsh67@bloomberg.net