Shareholders of Bank of America (NYSE:BAC) will vote later this month on whether CEO Brian Moynihan can continue to serve as chairman of the bank's board of directors. While a lot of ink has been spilled on this topic, and more will come over the next three weeks, it's important to recognize what the upcoming vote is, and more importantly isn't, about.
Let's start with what it isn't about. This isn't a referendum on Brian Moynihan. Yes, some commentators -- namely, Mike Mayo -- have tried to make it into that. Mayo has been arguing for months against the move based in large part on Bank of America's stress test struggles over the last five years. In this year's test, for instance, the $2.2 trillion bank had to resubmit its capital plan after uncovering a $4 billion discrepancy in its capital account. It was the third time in five years that the Charlotte, North Carolina-based bank wasn't given outright approval to increase the amount of capital it returned to shareholders.
But Moynihan didn't create the problems that he's been tasked with cleaning up. The damage had already been done when he took over as CEO at the beginning of 2010. Bank of America consisted at the time of a vast amalgamation of companies bought over the previous two decades. It had too many branches. It had too many employees. And, thanks to its 2008 acquisition of Countrywide Financial, formerly the nation's leading mortgage originator before transforming into a veritable criminal enterprise on the eve of the crisis, Moynihan's five-year reign has consisted largely of settling tens of billions of dollars' worth of legal claims brought by public and private buyers of Countrywide mortgages.
To be clear, Moynihan has made mistakes. At Bank of America's investors day in 2011, he predicted that the bank could be returning $12 billion in dividends by 2013 or 2014 and still be left with $30 billion to spend on buybacks and special payouts. We now know that things didn't work out that way. Last year, Bank of America earned only $4.8 billion total. And in 2013, its net income was $11.4 billion.
However, these are excusable mistakes. How was Moynihan supposed to know the extent of the legal issues that would scuttle its earnings for the next five years? The resulting costs were unprecedented -- upwards of $100 billion when you consider all forms of relief. This was unimaginable absent hindsight. On top of that, should it really be a surprise that Bank of America, given the magnitude of the issues it's dealt with over the last few years, has struggled through the Federal Reserve's annual stress tests? Even JPMorgan Chase and Goldman Sachs -- the two most respected and sophisticated firms in the financial industry -- had to resubmit their plans this year after the central bank disagreed with their capital planning process.
If anything, Moynihan has done a highly commendable job navigating Bank of America through the five worst years of its long history. He's sold dozens of subsidiaries to simplify the bank and raise capital. He's closed more than 1,300 branches. He's reduced quarterly operating expenses by more than $2 billion. He's slayed the lion's share of legal liabilities faced by the bank. He's even gained the respect and support of Warren Buffett. In short, if anyone deserves to be both the chairman and CEO of Bank of America -- which is how the vast majority (92% according to B of A) of large publicly traded companies are structured -- I struggle to understand how the 55-year-old executive isn't that person.
What the vote is about, in turn, is rather the distasteful way that Bank of America's board went about making him chairman. Shareholders of the bank voted to separate the roles in 2009 after Moynihan's predecessor, Ken Lewis, led the company to the brink of failure. Five years later, the board voted to reinstall the dual roles. But because it did so without shareholder approval, it flew in the face of shareholders' previous decision to separate the positions.
For the investors that matter most, namely institutional investors like the California State Teachers' Retirement System, this is the problem. They agree that Moynihan has done a "sensational job turning around the once-troubled lender," but they're upset that the bank's board would be so dense as to not recognize how their decision would look in light of the 2009 vote. "If the shareholders ratify [Moynihan's appointment] then so be it," a spokesman for CalSTRS told Forbes at the end of last year.
Thus, to the extent that the vote is a referendum, it's not one on Moynihan's performance; it's instead a referendum on the board of directors.