How companies like Bank
of America are opening their doors to hedge fund activists
9, 2015, 1:27 PM
Photograph by Ramin Talaie — Getty Images
When boards allow their weaknesses to
fester, they lay out the welcome mat for shareholders who want to
shake things up.
Has Bank of America opened the door to hedge fund
activists? It sure looks like it.
Buzzy Geduld, “who owns 2.5 million Bank of America shares
as head of New York-based hedge fund Cougar Capital” is
already threatening chairman and
CEO Brian Moynihan, according to a report from Bloomberg
last month. Geduld wants to see the CEO and chair jobs split at the
company. “I’d like to see someone from the outside who’s smart enough
and strong enough that Moynihan’s going to have to answer to,” the
hedge fund manager told Bloomberg. And if Moynihan can’t satisfy the
Federal Reserve that he’s fixed risk issues by the end of the month,
“I’d call for his head,” Geduld said.
At Bank of America (BAC),
like so many other companies across the country, governance and
operational weaknesses act like an open invitation to hedge funds.
When boards allow these vulnerabilities to fester—or create them
themselves—they might as well lay out the welcome mat and say, “Howdy,
y’all, come on in.”
A CEO and chair split at Bank of America has been a touchy
subject for some time. In 2009, when former CEO and chair Ken Lewis
was facing battles on every front, shareholders voted to split the
roles. But in October of 2014, the bank’s board of directors flouted
the shareholder vote and “unilaterally
changed the company bylaws to allow CEO Brian Moynihan to
become chairman,” CNBC reported. This May, after shareholder protests
and facing no votes on members of the board’s governance committee,
Moynihan and Jack Bovender, Bank of America’s lead director, agreed to
call a special meeting on Sept. 22 to get shareholder approval for the
Making a bylaw change contrary to a shareholder vote can
create upheaval. Such a move landed restaurant company Bob Evans in
hot water last year with activist firm Sandell Asset Management.
Although the board reversed its position, only two of its board
members still hold their seats. Michael Pryce-Jones, director of
corporate governance at CtW Investment group, says the unilateral
bylaw change at Bank of America “undermines Moynihan and is a no-win
for the company.”
Pryce-Jones is also concerned about the frequency with
which companies are giving hedge funds seats without a say from other
shareholders. “Backroom deals are giving hedge funds an outsize
influence,” he told me. According to a Wall Street Journal report,
“Last year, activists gained board seats at
a record 107 companies, 91 of them
through pacts negotiated with the companies.” That’s 85% of
the time—and Pryce-Jones says there is “a lack of transparency around
these deals” that’s unfair to other shareholders.
Some companies even give seats to hedge funds while at the
same time opposing proxy access. (Proxy access allows investors with a
certain percentage of shares to nominate directors onto the company’s
official slate.) Although
Bank of America has adopted
shareholder proxy access, Pryce-Jones cites Walgreen (WBA)
and Cheniere Energy (LNG)
as two companies that cut deals with activists for seats but have
refused to implement proxy access for long-term investors. Activist
Jana Partners was given Walgreen
board seats last year, yet
the board opposed an orderly proxy
access process recommended by shareholders this year.
Carl Icahn was given board seats in
August at Cheniere, but at its annual meeting, the board
opposed proxy access.
The saga at Bank of America isn’t happening at a great
time for Moynihan. The bank’s stock is currently hovering at a
third of its 2006 pricing.
And Cougar Capital isn’t alone in mentioning performance as an issue.
In an Aug. 31 letter to Bovender, giant pension funds CalSTRS and
CalPERS announced their intention to vote against the board’s bylaw
change. The letter said that “Bank
of America continues to be an under-performer” and
expressed concerns about the bank’s stress test failures.
Perhaps by October, the Charlotte-headquartered bank will
come out smelling like a rose. But the next 30 days are definitely
showtime for Moynihan and the board.
Eleanor Bloxham is CEO of The Value Alliance and Corporate
Governance Alliance (http://www.thevaluealliance.com),
an independent board education and advisory firm she founded in 1999.
She has been a regular contributor to Fortune since April 2010 and is
the author of two books on corporate governance and valuation.