Here’s kind of a weird claim about Tuesday morning’s Bank of America shareholder vote: “Anything less than a 70 percent support level is really going to demand questions of this board,” Michael Pryce-Jones, corporate-governance director at CtW Investment Group, said in a Bloomberg TV interview before the meeting.
The story here is that Bank of America’s shareholders had previously voted for a binding bylaw requiring Bank of America to have an independent board chairman separate from its chief executive officer. And then after a while, Bank of America’s board decided, you know what, never mind, we’ll just make Brian Moynihan chairman and CEO, and it changed the bylaws to get rid of the independent-chairman requirement. And then shareholders complained, and so Bank of America announced that it would hold a not-quite-binding vote to “ratify” the new bylaws. The board and management argued strenuously that the shareholders should ratify the bylaws and let Moynihan keep both jobs, and on Tuesday shareholders agreed, though by a small enough margin – “Approximately 63 percent of shares voted were cast in favor of the proposal” – that Michael Pryce-Jones won’t stop demanding questions.
And that’s his right, but the key thing to remember is that the last time Bank of America did this, it was a binding vote on whether to separate the chairman and CEO, and the board argued for keeping those roles together, and the board got less than 50 percent of the vote for its position. And I don’t want to say that that didn’t matter, exactly – Bank of America really did pick an independent chairman, and had one for five years – but it didn’t really matter. The shareholders changed the bylaws, but the board could change them right back, and it eventually did. (Both the shareholders and the board have the right to change the bylaws, but the shareholders usually meet only once a year, while the board can meet whenever it wants, giving it a big advantage. The shareholders can change the bylaws, but then the board can change them back the next day, and the shareholders have to wait a year to change them again.)
Obviously, if the board did that, shareholders would get mad, but then what? They could vote against the directors at the next annual meeting. Bank of America’s bylaws require directors to get a majority of votes cast. But if one doesn’t — if more shares are voted against a director than for him — then he doesn’t just slink off in disgrace. Instead, “our Board, with the assistance of our Corporate Governance Committee, will consider whether to accept the director’s offer of resignation which is tendered under our Corporate Governance Guidelines and will publicly disclose its decision within 90 days.” So if shareholders vote to kick out a director, the result is … nonbinding. The result is that the other directors get to consider whether to actually kick him out. And even if they do, that creates a vacancy, which can then be filled by the board of directors.
The point here is that: The board can do whatever it wants, and If shareholders don’t like it, their recourse is mostly limited to going on television and saying hurtful things about the board.
Shareholder democracy here is largely symbolic and vestigial: Boards try to mostly sort of do what shareholders want, because it looks bad not to, and because people are basically decent and prefer to avoid conflict and don’t like hearing hurtful things said about them on television. But if boards really don’t want to do what the shareholders want, they don’t have to. It’s impolite, perhaps, but there’s not much the shareholders can do about it.
I mean! Classically, there are two things the shareholders can do about it. One thing they can do is sell their stock, which serves the twin purposes of (1) allowing them to stop worrying about what’s going on at Bank of America and (2) punishing Bank of America’s executives for their sins by lowering the stock price and, thus, the executives’ net worth. (If they own a lot of the stock.) This can be a somewhat unsatisfying result, though: What if you think that Bank of America is a good (or at least underpriced) business, but you’re mad at the directors for slighting you? Selling the stock in that situation feels more like punishing yourself than punishing them.
The other thing shareholders can do is mount a proxy fight and really throw out the directors: If a competing candidate gets more votes than the board’s candidate, there is no game of nonbinding resignations. The winner takes the job, and the loser leaves. This happens sometimes! Frequently it happens in the context of hostile acquisitions. An acquirer comes in to try to buy the company, is rebuffed by the board, and mounts a takeover attempt via proxy fight. The theory is that the possibility of a hostile takeover is what forces managers and directors to pay attention to shareholders. If the shareholders are disgruntled – perhaps because the board keeps ignoring their nonbinding votes – then the stock price will go down, the company will be attractive to acquirers, and the shareholders will vote for a sale because it’s better than the incumbent management. But this theory doesn’t particularly apply to a giant bank. Who would acquire Bank of America? Who would have the money? Why would a regulator let them?
Proxy fights sometimes happen without hostile takeovers, but again it seems unlikely for a bank. When hedge fund Starboard Value was unhappy with Darden Restaurants, which owns Olive Garden, it mounted a proxy fight, and won, and replaced Darden’s board and management, and literally went to work waiting tables at Olive Garden. But that is Olive Garden. Starboard owned about 8.8 percent of the company, worth about $573 million at the time of the shareholder vote. It would cost about $14 billion to buy the same percentage of Bank of America. Proxy fights are expensive, and a shareholder with a big concentrated stake in a medium-sized company has a lot of incentives to run a proxy fight and try to change it. But it’s harder to build a big concentrated stake in a giant company.
And Bank of America isn’t just a big company; it’s a bank. If you replace the board and management of Olive Garden overnight, it will more or less keep functioning. Maybe the pasta water will get a bit saltier, maybe the bread sticks will come out a bit slower, but it would take a while to break Olive Garden. You could break Bank of America in 10 minutes. A big universal bank is a collection of massive terrifying forces that have been carefully balanced against each other so that no one of them overwhelms the others and washes the bank away. If someone goes out for a smoke at the wrong time, the whole system could come crashing down. Firing all the directors and senior managers at once is just not on. Regulators would not like it, and no responsible shareholder would vote for it.
The market for corporate control provides the coercive backdrop to all the nonbinding shareholder votes at most normal companies. But that market doesn’t quite function for big banks. There is a sense in which that is fine. Big banks should be less answerable to their shareholders than other companies are. Banks are sort of a public trust, and can’t be run entirely for the benefit of shareholders. They use a lot of borrowed money and impose a lot of systemic-risk externalities and are subject to a lot of regulations. The things that shareholders stereotypically want – increased leverage, share buybacks, more risk-taking – are exactly the things that banks aren’t supposed to give them. Of course shareholder democracy is weaker for the banks than it is for regular companies. And while bank managers might be less constrained by shareholders, they are more constrained by regulators, so it’s not like they can do whatever they want without any supervision. But sometimes they can ignore shareholders and the shareholders can’t do much about it, and that hurts.
