Revolt by B of A shareholders

In order for the worldwide economy to emerge from the global recession it is important that the leaders of the companies that contributed to the problems change. Sound familiar? Yup, I’ve been harping on this for a while now. So how does one go about facilitating the exit of poor executives? There are two entities that are so empowered: board members and shareholders.

Unfortunately, board members are much closer personally to the executives of businesses than to shareholders. The personal intimacy usually means that boards of directors are reluctant to oust executives, especially the CEO. Additionally, it is most often the case that the chief executive officer also serves as the chairperson of the board of directors. To my way of thinking this is an inherent conflict of interest as the board is supposed to serve as the shareholder watchdog of the executives of businesses. Also, the chairperson is the most powerful of the board members and typically is responsible for setting the tone and direction for the entire board. Thus, it is highly unlikely that you can count on the board of directors to oust a lousy executive.

That brings us to shareholders. The problem is that most of these shareholders do not control a large enough block of shares to be able to gather enough votes to overwhelm all of the other shareholders. Nor do they have enough shares to be able to put forth their own candidate for chairperson, or other board members for that matter. Additionally, most shareholders of note in corporations are big institutional investors like the mutual fund firm that I used to work for. These institutions typically do not spend their shareholders’ monies to fight a board of directors or executive team, instead they just sell the shares of stock they own in the business rather than fighting. This is the much cheaper solution to resolving a problem of disagreeing with an executive team or board. Can you see that?

So then what to make of the story on Wednesday that shareholders of Bank of America ousted CEO Ken Lewis from his position as chairperson of the board of directors? We can only celebrate the activism by shareholders to oust Lewis. Though the new choice for chairperson is an odd one, Walter Massey, chairperson emeritus of Morehouse college. I say this is an odd choice only because Massey is very near the mandatory retirement age of board members and has no professional banking experience. However, the fact that shareholders were able to affect change at a major U.S. corporation is important. I note with interest that the principal shareholder responsible for having instigated the ouster of Lewis was a union called, “Change To Win.” In other words, it was not a mutual fund, pension fund, or hedge fund manager – no, it was someone who is a longer term investor – a rarity these days.

I would anticipate that if business boards continue to reward poor executive performance with continued employment and big bonuses that we will begin to see shareholders be more activist in wielding their votes. Let’s hope so.

Have a good weekend – I am headed to see the X-Men movie.

Jason