The vote that decided Bank of America (NYSE:BAC) CEO Brian Moynihan's fate as chairman of the board wasn't that close after all. At a special meeting of shareholders held on Tuesday, the $2.2 trillion bank announced that approximately 63% of shares voted were cast in favor of allowing the 55-year-old executive to retain both titles.
The question of whether Moynihan should be permitted to serve as chairman of the board while at the same time acting as the bank's CEO arose at the end of last year, when Bank of America's board of directors unilaterally reversed a 2009 shareholder vote splitting the roles. The underlying issue in today's vote was thus less about Moynihan's performance and more about dissatisfaction with the board of directors. "It should be a vote on the board," said longtime industry analyst Richard Bove of Rafferty Capital Markets. "The board should be eliminated for putting the shareholder in this position."
One could even argue, as I have in the past, that Moynihan's performance since taking over in 2010 has been exemplary. He's slayed an unprecedented tens of billions of dollars' worth of legal claims incurred as a result of Bank of America's 2008 acquisition of Countrywide Financial. He's simplified the business by selling off noncore assets and dramatically reducing operating expenses. And he's brought it back to the precipice of respectable performance. In the latest quarter, the bank generated a 0.99% return on assets, which is just under the 1% threshold that's long been associated with high-performing banks.
It would have been particularly unwise, in turn, to demote Moynihan following these accomplishments. While the research into whether so-called "CEO duality" helps or hurts a company's performance is inconclusive, one of the studies on the topic found that demoting a CEO after a period of good performance tended to reduce future profitability. It's for this reason that one of the study's authors, Professor Ryan Krause of Texas Christian University, told me that the first rule when it comes to splitting the roles is to "do no harm."
"While it's true that having an independent chairman minimizes the risk of opportunism on the part of the CEO, it may also introduce a lack of innovativeness and discourage good risk-taking by the executives that are tasked with running the business on a day-to-day basis," said Krause. The TCU professor went on to note that many companies with operations abroad, and particularly in highly hierarchical societies such as China and Japan, benefit from having the roles combined. Government and business officials in those societies want to talk to the most senior officer at a firm. That would exclude the CEO if he or she isn't also the chairman.
To be clear, there are strong ideological arguments in favor of splitting the roles as a matter of course. The board's job is to represent shareholders by providing oversight and guidance to the executives. This is difficult to carry out objectively if the top executive is also the head of the board, with the power to set the meeting agenda and preside over the gatherings.
Bank of America sought to reduce shareholder concern over this last year by appointing a lead independent director, Jack Bovender. The former chairman and CEO of HCA, was granted the additional authority to:
- Together with the chairman/CEO, planning, reviewing, and approving meeting agendas for the board.
- Advising the chairman/CEO of the information needs of the board and approving information sent to the board.
- Acting as a liaison between the chairman/CEO and the 13 independent directors.
- Calling meetings of the independent directors.
Ultimately, while shareholder activists may find Tuesday's vote disappointing, the good news is that Bank of America can now move on to what really matters: further improving profitability and returning the Charlotte, N.C.-based bank to the apex of American finance.