Updated from 5:50 p.m. EDTBank of America ( BAC - Get Report) shareholders voted to oust CEO Ken Lewis from his role as chairman of the board by a narrow margin Wednesday, as investors at the company's annual meeting expressed disappointment with his handling of the Merrill Lynch deal and the bank's slumping shares. Director Walter Massey was chosen to replace Lewis as chairman, though Lewis will maintain his positions as president and CEO, the company said. All 18 directors were voted in by what BofA characterized as "comfortable margins." Seven other proposals were rejected. Some angry shareholders have been making a strong push to rebuke Lewis, who they say made poor decisions regarding the Merrill acquisition, which helped push BofA's shares down significantly. Though BofA shares closed up about 6.5% at $8.68 amid a broader rally Wednesday, they are down nearly 40% for the year and nearly 80% over the past 52 weeks. During the meeting, Lewis acknowledged that 2008 was "a very difficult year" and that BofA shareholders "have carried a heavy burden recently." One key point of contention is whether BofA will have to raise more capital at the conclusion of recent government stress tests of the nation's 19 largest banks. The Wall Street Journal on Tuesday reported Citigroup ( C - Get Report) and BofA were being pushed to raise more money. Options for BofA include converting preferred equity stakes into common shares, as Citi did earlier this year, but that would dilute current shareholders. "We're still waiting to hear from our regulators about what will be required, so we don't have enough information at this point to make a decision," Lewis said at the top of the meeting, in response to whether it might pursue a conversion. Lewis also said he could not discuss details of the stress tests, which are not yet complete, until he gets the green light from regulators.
The vote tally showed that of the 18 board members, those who were opposed by major activist groups had the least support. Lead director O. Temple Sloan had the most opposition, with 37.4% voting against his re-election. He was followed by Lewis, who had 32.7% against his re-election, and chair of the asset quality commission Jackie Ward, who had 28.2% of investors voting against her. The vote for an independent chairman was approved by just a hairline margin, with 50.3% of investors voting in favor. Massey, the new chairman, has been a director on Bank of America's board since 1998 and serves on the audit committee. He also serves on the board of McDonald's ( MCD - Get Report) and was previously a director of Delta ( DAL - Get Report) and Motorola ( MOT). Within the meeting at the Belk Theater of the North Carolina Blumenthal Performing Arts Center on Wednesday, there was mixed sentiment. Some supported Lewis as the leader of a U.S. banking benchmark in one of the most difficult recessions the country has ever faced, while others blasted his decisions and pay package while mourning the loss of retirement savings that had been holed up in BofA shares. Protesters from half a dozen groups including environmental interests, the labor union SEIU and shareholders were among the crowd, including one who held a photograph of a BofA corporate jet outside the theater as investors filed in before the meeting started. John Moore, a shareholder who owns a Charlotte real estate development company, said "now is the time for Mr. Lewis to resign," expressing doubt that the company would take more proactive action.
" It's hard for the board to fire him without firing themselves," he says. SEIU spokesman Stephen Lerner said the union is there as both shareholders and an entity concerned about the bank. "Bank workers are calling unions, they're very unhappy," Lerner says. "Banks are unionized in almost every country but the U.S." An assortment of high-profile names have come out against Lewis and certain directors, accusing them of making irresponsible decisions by sealing the Merrill Lynch deal, despite escalating losses. Longtime shareholder
Jerry Finger launched a campaign to unseat Lewis back in March, and has been joined by CtW Investment Group, which represents pension funds. The huge pension fund California Public Employees' Retirement System ( CalPERS) officially joined the effort on Tuesday, though both CALPERS and California State Teachers Retirement System (CalSTRS), filed suit against BofA last month related to the Merrill deal. The well-known activist shareholder Evelyn Davis, who calls herself the "Queen of the Corporate Jungle," spoke in Lewis' defense, at one point approaching the CEO at the podium to embrace and kiss him. She called critics a bunch of "Johnny Come Latelies who really know nothing about the company." Lewis, in another effort to defend the decision to buy Merrill, said that while he considered invoking a material inverse clause, or MAC, to walk away from the Merrill deal, he ultimately decided it was "not in the best interest of the shareholders." His statement also addressed criticism stemming from the release last week of testimony before investigators in New York Attorney General Andrew Cuomo's office, in which Lewis said he was pressured by Federal Reserve Chairman Ben Bernanke, and then-Treasury Secretary Henry Paulson to complete the Merrill deal.
Lewis indicated to the investigators that Bernanke and Paulson said BofA would have to complete the deal to support the financial system and broader economy. Some investors felt BofA leadership had shirked its duty to protect shareholder value. Lewis said the deal was not completed out of an "inflated sense of altruism or patriotism at the expense of shareholders." "My view is that for the largest bank in the country, there is little difference between our shareholders' interest and our country's interest," Lewis said. He added that while BofA shares have lost significant value, the Merrill acquisition is not the sole cause of the stock slump. "To think that without Merrill that our stock price and dividend would be where it was in September is terribly mistaken," he said, noting that Merrill contributed $3.7 billion to BofA's first-quarter bottom line. Still, BofA received an additional $20 billion to cover Merrill's losses, giving the government an expanded stake and effectively placing the bank in the same league as troubled competitor Citigroup, at least in the public eye. Details of neither Merrill's deteriorating loan portfolio --which caused over $15 billion in fourth-quarter losses -- nor the $3.6 billion in bonuses it distributed for 2008 were disclosed to shareholders before they approved the deal. The Merrill deal also opened BofA up to public angst over bonuses distributed at the struggling investment bank immediately before it was acquired, as well as lawsuits and an investigation by Cuomo. Those woes come on top of issues in Bank of America's own legacy assets, which stand to weaken if unemployment sails higher and the economy continues to worsen.
While the company topped expectations with a
first-quarter profit of $4.2 billion, it also set aside $13.4 billion for near-term credit losses. BofA still holds nearly $70 billion in "key capital-markets risk exposures" from Merrill Lynch, like super-senior collateralized debt obligations, or CDOs, and credit default swaps, or CDS. Though none besides the chairman-CEO split were approved, some other shareholder proposals touched on hot-button issues and received relatively strong support. A proposal for special stockholder meetings received 49.4% of votes in favor, an executive compensation advisory proposal won 40.1% in favor, a cumulative voting proposal won 37.8%, a proposal on predatory credit card practices won 33.4% and a proposal on limiting executive compensation won 26.8%. By comparison, a proposal on disclosure of government employment garnered just 7.8% of votes in favor, and one on health-care reform received just 7.5% of votes in support. Staff reporter Ted Reed in Charlotte, N.C. contributed to this report.