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Bank of America (BAC)
It's About Time BofA Cleaned Out Its Board
Bank of America continues to suffer from the fallout of the Merrill purchase last year. BofA was relatively healthy up until that deal last fall. Sure, there was some indigestion from buying Countrywide but that was mostly small potatoes. The Merrill deal forced Ken Lewis to ask the government for money and the $45 billion he got came with a bunch of strings. The latest is that the Treasury Department is actively forcing BofA to reconfigure the board and bring in people that actually have prior banking experience (you would think that would be a pre-requisite already if you are charged with overseeing the management of the nation's biggest bank). Ordinarily, we are one of the first to cringe when government starts picking out appointees to private boards but in this case, it is very clear that the current system is broken.
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The Bank of America board is a joke. It is mostly filled with retired executives who made their name in fields other than finance. They sit on boards of other companies and have other interests and therefore, supervising the management of BofA is not their sole priority. A lot of the appointees have also been hand-picked by current management and therefore, are loathe to criticize it. By no means is this situation exclusive to BofA, there are numerous other companies (e.g. Citigroup (C: Charts, News, Offers)) that have unqualified personnel sitting in these positions. But BofA is a great demonstration of what happens when the board is ineffective. The CEO feels like he is bulletproof and can do what he solely deems right. That is why BofA CEO Ken Lewis bought Merrill with 2 days of due diligence (when he could have waited for a week and bought the firm in bankruptcy for a much cheaper price, if at all). The board did not have the ability and the inclination to investigate the purchase independently and so they rubber-stamped it. That deal generated $15 billion in losses in December and when Ken Lewis wanted to back off the merger, the government essentially told him that he couldn't do it or he would lose his job. Lewis, in an utter display of selfishness, decided to protect his position instead of that of the shareholders. And the board was again too spineless to do anything about it.
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So the fact that the government is looking to shake up the board is a positive. Yes, overseeing the board is actually the responsibility of the shareholders and that is the way things are supposed to work but they don't. BofA shareholders voted to remove Ken Lewis as chairman recently but his replacement, Walter E. Massey, doesn't make sense either. Massey is a distinguished academic (having most recently spent 12 years as the president of Morehouse College) but he is not an expert in the financial service industry. And he has been on the board for the last 11 years which means he was right there when Ken Lewis was destroying shareholder value. To be sure, when you have the government meddling in the affairs of the board you might end up with a bunch of bureaucrats as board members but even they could do a better job than the current incumbents. A long-term solution would be a change in corporate governance laws to allow shareholders greater and more direct say in the composition of the board. In the meantime, other companies can learn from BofA's mistakes and understand the consequences of having a weak board -- things might be cozy for management but over the long-term, serious mistakes will be made and Uncle Sam will eventually get involved.
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What else is in store for BofA besides a new board? Ken Lewis will probably be gone in six months to a year, a lot of analysts like Brian Moynihan, the current president of global banking and wealth management, as a replacement. Investors shouldn't expect the TARP burden to be lifted anytime soon. Lewis has said that he would like to pay back the $45 billion of government money in months, not years. That might be too optimistic given the fact that the recently concluded stress tests found that BofA was short about $33 billion in capital. Progress is being made towards covering up that shortfall (e.g. $7.3 billion was raised by selling off a part of the company's stake in China's second largest bank) but even if we end up having a relatively quick economic recovery, BofA will still need at least 2 years to earn itself out of TARP. And then the pressure will shift to the earnings front. BofA will have to prove that it can do what Citigroup couldn't do and what a lot of analysts believe cannot be done -- profitability employing the financial supermarket strategy. There are already murmurs of a Merrill spinoff via an IPO down the road.
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