Wonder why shareholders are so cynical? Why we're inclined to treat stocks as if they were lottery tickets instead of ownership in an actual company? Why investing for the long term increasingly seems like a sucker's game?
Just take a look at what happened at the Bank of America (BAC, news, msgs) shareholders annual meeting April 29.
Ken Lewis, the company's CEO since 2001 and its chairman of the board of directors, was re-elected to the board by shareholders. According to the company, the results weren't even close: Lewis reportedly got 67.3% of the vote.
That came after Lewis' disastrous acquisition of Countrywide Financial added to Bank of America's exposure to the subprime-mortgage disaster and after Lewis overpaid to acquire Merrill Lynch and then misled shareholders about the size of the loss Merrill would report.
Serial poor decisions
And, just in case you're inclined to cut him a little slack by saying, "Hey, who didn't get torched by the financial crisis?" remember that these recent deals were just the latest in a string of similar deals at shareholder expense. There was the 2004 acquisition of FleetBoston for $47 billion (a 40% premium), the 2006 acquisition of credit card lender MBNA for $35 billion near the height of the credit bubble (and at a 31% premium to the already inflated stock price), and the 2006 and 2007 acquisitions of U.S. Trust and LaSalle Bank, respectively, at nosebleed prices.After a furious campaign by some of Bank of America's biggest stakeholders, including the California Public Employees' Retirement System, the country's largest pension fund, shareholders managed to walk away from the annual meeting with a tiny victory. By just about the slimmest of margins, with 50.3% of the vote, shareholders forced the company to separate the offices of board chairman and CEO. In theory, an independent chairman would provide an important reality check on the strategies of the CEO.
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In theory. In reality, Bank of America turned this "victory" into a slap in the face. The company's new chairman of the board is Walter E. Massey, a former president of Morehouse College. Massey, 71, has been a member of the Bank of America board since 1998 and during that time approved all of the Lewis deals that many shareholders were protesting by their votes.
Lewis, who remains the CEO, is now talking about staying on at least until the current crisis is over and perhaps as long as three years.
Why it matters
What happened at Bank of America last week is important to all investors, not just those unfortunate enough to own B of A stock, and to the future of the financial markets. And the implications are truly disheartening to anyone who would like us to move away from the stocks-as-lottery-ticket mentality of the past decade.Frankly, looking at the Bank of America vote, I'm left wondering why anybody in their right mind would think the stock market is even remotely fair to investors these days.
All 18 members of Bank of America's board were re-elected along with Lewis. These folks have been asleep at the switch for all of Lewis' deals, have approved his strategy and have failed to show the slightest sign of independent judgment.
This is a profoundly anti-shareholder management. Lewis actually told shareholders at the annual meeting that the board had no legal obligation to disclose talks between the government and the company about the Merrill Lynch acquisition. No legal obligation to disclose that B of A wanted to walk away from the deal after it looked at the size of Merrill's losses? No legal obligation to disclose that B of A wanted to adjust the purchase price? No legal obligation to disclose that Lewis felt pressured by the government to go through with the deal -- if that is, as Lewis claims, what actually happened? Just whose money did the board think was at stake?
But what would you expect from a CEO who told shareholders asking questions about the Merrill deal that he wouldn't talk because of pending shareholder lawsuits. If you want an answer, he told a questioner, withdraw your lawsuit.
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Interest rates on Treasurys could skyrocketThe sale of $500 billion in Treasurys in the first quarter pushed up interest rates. An additional $750 billion is set for sale by September. That's not good news for the economy.
How are they getting re-elected?
So why did Lewis and the rest of the board get re-elected and with such big margins? Because the deck is profoundly stacked against shareholders who want to challenge management.In this case, the mechanism that probably kept Lewis and the other directors in their seats is something called broker votes. Financial advisers, according to Securities and Exchange Commission rules in place since 1937, are allowed to cast votes for their clients if the clients don't give their advisers voting instructions at least 10 days before the vote. Historically, broker votes have gone overwhelmingly to management.
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I guess I can understand why financial advisers might vote that way: Most wouldn't want to admit that they'd put their clients' money into a business run by incompetents. But I can see a huge potential conflict of interest between advisers who don't want to admit they blew it and shareholders who want someone capable of making money to run the company.
According to a pre-vote calculation by Change to Win, a coalition of labor unions opposed to Lewis, about 22% of the votes in the Bank of America election would be broker votes.
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Greed is right and the tide is turning on the thieves. The perps have been called out and they will get theirs. Pay is getting press now on ceo's and boards will get the negative press they deserve. This crooked club has been stealing for 100 years and their time has come.