Shareholders of Bank of America (NYSE:BAC) vote this week on whether to allow the bank's chairman and CEO, Brian Moynihan, to retain both titles. The result of the vote isn't likely to have a meaningful impact on the $2.2 trillion bank's improving profitability, but a vote in favor of splitting the roles will serve as a referendum on the board of director's 2014 decision to unilaterally recombine the positions after a majority of shareholders voted to separate them in 2009.
Bank of America argues (opens PDF) that having the "same flexibility on board leadership that 97% of [S&P 500 companies] now have, while still providing strong independent oversight, is in the best interest of stockholders." It has also conducted a charm offensive over the last few months to convince shareholders that the roles should remain joined -- or, rather, that the board of directors should have the power to decide whether or not to combine the roles.
- It cited Warren Buffett's support for Moynihan.
- Its recent presentations are geared toward demonstrating the progress the bank has made under Moynihan's watch.
- And multiple media reports seem to confirm that executives at the bank have personally reached out to large institutional investors who could sway the vote.
What's important to realize, however, is that the upcoming vote has little do to with Moynihan's success since taking over in 2010. This, at least in my opinion, is beyond dispute. He's slayed tens of billions of dollars' worth of legal claims, yet increased the bank's capital and liquidity. He's dramatically reduced expenses, cutting them by more than $2 billion a quarter. And he's overseen critical technological improvements to online and mobile banking that will help Bank of America stay competitive for years to come.
The vote is instead about the inexplicable decision by the board of directors to recombine the roles without asking for shareholders' input. "It should be a vote on the board," said Dick Bove of Rafferty Capital Markets, "the board should be eliminated for putting the shareholder in this position." Indeed, it's hard to image why the bank's board did this. It was, at the very least, an egregious mistake.
But despite countless academic studies on the issue of whether a combined CEO/chairman helps or hurts a company's performance, there is virtually no evidence of a link -- aside from theoretical arguments, that is. A 2001 study by Yale Law School professor Roberta Romano found that there is "no statistically significant difference, in terms of stock price or accounting income, between companies that split the roles and those that don't." Even the shareholder advisory company, Institutional Shareholder Services, which has encouraged Bank of America shareholders to split the roles in next week's vote, has acknowledged that "attempts to correlate the separation of positions with market performance have been inconclusive."
The closest that anyone has come to linking a company's financial performance to a dual CEO/chairman was a 2013 study by Ryan Krause and Matthew Semadeni, professors at Texas Christian University and Arizona State University, respectively. But their analysis merely found "strong support for the prediction that a CEO-board chair separation would promote strong future performance only when it followed weak performance." By contrast, Krause and Semadeni say that a "separation following strong performance would hurt performance going forward."
As they explained:
For poorly performing companies, demoting the CEO can be a real boost. Among the sample examined, a CEO demotion reversed a company's annual stock return by 140%. So, if the company's value declined by 4% and the board subsequently demoted the CEO, we would expect to see a shareholder gain of roughly 6% the next year.
But even though there is little evidence of a positive impact from splitting the roles, multiple major institutional shareholders have come out against Bank of America's board's decision to recombine them. Among others:
- "We believe the Board's rationale for making this change is fundamentally flawed and we disagree with many assertions made in the [bank's proxy materials on the issue]," the California Public Employees' Retirement System and the California State Teachers' Retirement System said in a letter earlier this month to the bank's lead director, Jack Bovender.
- "When the Bank of America board chose to revoke the independent chair bylaw they made a fundamental error, undermining investor confidence and calling into question their commitment to accountability," said New York City comptroller, Scott Stringer, who confirmed that the city's pension funds will vote against Bank of America's board next week.
The outcome of the vote is nevertheless far from a foregone conclusion. Two years ago, JPMorgan Chase faced a similar vote to split the roles, both of which are held by Jamie Dimon. But only 32% of votes were cast in favor of doing so. Even more importantly, four out of five of Bank of America's largest shareholders are all overseen by executives who similarly occupy both roles at their own companies -- Vanguard's Frederick McNabb II, State Street's Joseph Hooley, BlackRock's Larry Fink, and JPMorgan's Dimon. It's also worth pointing out, of course, that Buffett himself is both chairman and CEO of Berkshire Hathaway.
Thus, the outcome seems just as likely to be in favor of keeping the roles combined as it is to separate them. Either way, there's little consolation in all of this for Bank of America's shareholders, who shouldn't have been put in this position in the first place.