Shareholder activists won a major triumph Wednesday when Bank of America ( BAC) shareholders stripped CEO Ken Lewis of his chairman title. The Charlotte, N.C.-based banking titan announced late Wednesday that in response to a vote on a shareholder proposal at the firm's annual meeting Wednesday,
Lewis would no longer be chairman , but remain in his role as president and CEO. The proposal, which won by a slim margin, was a major priority of labor unions and other dissident shareholder groups, which have pursued similar measures across the financial sector and corporate America. " W e are seeing this issue gain more shareholder support this year, likely spurred by the economic climate and continuing investor concern about board leadership," according to a statement by corporate governance firm RiskMetrics.
According to RiskMetrics, 48 companies received a shareholder proposal seeking an independent chairman, but not all of the proposals will be voted on. Based on tallies so far, the average level of support for splitting chairman and CEO roles stands at 39.2% vs. 29.3% a year earlier, RiskMetrics estimates.
RiskMetrics says that based on 2008 data of S&P 500 companies, 34% had a separate CEO and chairman, but only 14% had a board chairman classified as "independent," which is defined as someone who does not have a material connection or significant financial stake in the company. Still, the percentage of companies with independent chairman is larger than in 2007, when only 11% had nonexecutive chairmen. BofA shareholders are angry at the company for the battering its stock price has taken and going though with its acquisition of Merrill Lynch, even after uncovering huge losses late last year. But BofA is certainly not the first financial firm of late to split its chairman-CEO roles.
Citigroup ( C) named Vikram Pandit to succeed the ousted Charles Prince as CEO in late 2007, but gave Prince's chairman title to Sir Win Bischoff. Bischoff was succeeded earlier this year by independent director Richard Parsons, after regulators pushed for his replacement as the company's position became more precarious. Rich Ferlauto, the director of corporate governance and pension investment at the American Federation of State, County and Municipal Employees, or AFSCME, says that all financial firms "need to move in that direction," including well-run companies such as JPMorgan Chase ( JPM). AFSCME was a supporter of the BofA proposal. "There is a very strong trend, particularly for companies or sectors like the finance sector that has been underperforming," Ferlauto says. "
Y ou can't have the board whose job it is to oversee management being controlled by the lead manager." "These large financial institutions are just too complex and too large to have one person do two roles," he adds. "It's a full-time job to expertly execute the strategic and management operations. It's another full time job to do strategic planning. And particularly for these larger firms ... that have significant headwinds, it requires much more of a focus than one person can do." Last May, after it reported its first-quarter loss was 80% higher than it initially said, Wachovia announced that former chairman and CEO Ken Thompson was giving up his seat at the head of the company's board. Longtime independent board member Lanty Smith took on the chairman role at the company. Thompson had said the arrangement would allow him to focus on steering the company through the difficult economic environment, but many also saw it as a move to appease angry shareholders.
But Thompson was replaced as CEO by Robert Steel less than a month later. More than three months after that, Wachovia, nearing failure, agreed in late September to sell its banking operations to Citi with federal assistance. Wells Fargo ( WFC), in a deal that required no federal assistance, later trumped that deal and prevailed in a legal battle with Citi. Washington Mutual stripped Kerry Killinger of his chairman title last June, after shareholders voted for a nonbinding measure. Killinger was later replaced as CEO by Alan Fishman, but WaMu failed in late September and was acquired by JPMorgan Chase for a mere $1.9 billion. Former investors in the Seattle thrift have seethed over the company's alleged missteps in the housing and credit crises. Separate chairman and CEO positions are common overseas. Approximately 70% of the largest companies in Europe have split roles, according to a 2006 Russell Reynolds report. Some countries, such as Germany, have laws regulating the issue. Other countries, like France, have passed laws that define -- but do not regulate -- the two roles more specifically. In the U.K., a majority of companies have split roles, the report says. And the Office of Federal Housing Oversight several years ago mandated that government-sponsored mortgage giants Fannie Mae ( FNM) and Freddie Mac ( FRE), in the wake of accounting scandals, agree to split their chairman and CEO roles. But while splitting the roles may placate shareholders, there also are legitimate good governance reasons to make the move.
CEOs typically set company strategy, give guidance to their senior team leaders and are ultimately accountable for driving net income and shareholder value, while the nonexecutive board chairs oversee the board of directors and the various committees to work in the best interests of the shareholders, said Jeff Warren, head of the financial services practice at executive search firm Russell Reynolds Associates. "What we saw
Wednesday was a clear indication of significant shareholder discontent with the board of directors and management at Bank of America," says Richard Clayton , CtW Investment Group's director of research. "This change follows in a pattern of changes to the financial services industry where more and more companies are being pushed by their shareholders to create a better set of checks and balances in hopes that it provides greater board oversight and more accountability to shareholders," he adds. But CtW wants BofA to take the change one step further. "We think the most important step for Massey to take is to establish a process for CEO succession," Clayton says.