Investors Chide Bank of America on Combining Chairman-CEO Roles


Three of the largest pension systems in the U.S. are pushing back on the bank’s move, announced earlier this month. The resistance from the California Public Employees’ Retirement System, the California State Teachers’ Retirement System and the adviser to New York City’s five pension funds may result in a variety of steps to try to improve governance, including a shareholder campaign to challenge the move in the spring, according to people familiar with the matter.

Bank of America set off these investors’ ire when its board changed the bank’s bylaws Oct. 1 to allow it to combine the chairman and CEO roles, then announced later that day that it had given the chairman’s job to Mr. Moynihan. The move essentially unraveled a binding 2009 shareholder resolution to separate the positions. A majority of shareholders, including the three pension systems, had voted for that change at the bank.

“They have flaunted the will of the shareholders,” said Anne Sheehan, corporate-governance director at the California State Teachers’ Retirement System, or Calstrs, the second-largest pension fund in the U.S. by assets. “It’s like the board poking their finger in the eye of investors,” said Michael Garland, director of corporate governance to New York City Comptroller Scott Stringer, who advises the five New York City pension funds.

 Collectively, the three pension systems control 93 million Bank of America shares, or about 0.9% of shares outstanding, according to the most recent data available.Bank of America’s board is within its rights to combine the positions, because the board of virtually any company incorporated in Delaware is allowed to alter corporate bylaws, even if it means undoing a previous shareholder change.Some big shareholders supported the move, including Warren Buffett , whose Berkshire Hathaway Inc. made a $5 billion investment in the bank in 2011.“I support the Board’s decision 100%,” Mr. Buffett said in an email Wednesday in response to questions from The Wall Street Journal. “Brian Moynihan has done a superb job as CEO of Bank of America and he will make an excellent Chairman as well.”

But Calstrs already has told the bank of its concerns and is in discussions with Mr. Stringer’s office about its next steps, according to a Calstrs spokesman. Options include filing another proposal to separate the roles or urging shareholders to vote against the re-election of certain board members, said people familiar with the discussions. The deadline to submit any proposals for the company’s 2015 annual shareholder meeting is Nov. 27.

“We’re always eager to get input from our major shareholders and would welcome the opportunity to discuss in detail the thinking that led to the decision,” a bank spokesman said.

The prospect of a new challenge highlights the recent consolidation of power around Mr. Moynihan, the 55-year-old lawyer who is nearing his fifth anniversary as CEO. The 2009 shareholder vote to separate the roles stripped his predecessor, Kenneth Lewis , of the chairman’s title. Mr. Lewis left the bank later that year.

The groundwork to give Mr. Moynihan the chairman role was laid long ago. Chad Holliday, who was chairman for the past 41/2 years, hinted at the move early in his tenure when he told top bank officials that the board would eventually be run by a Bank of America executive, said a person familiar with those conversations. By early 2013, some board members started informal conversations about naming Mr. Moynihan chairman, according to people familiar with those conversations. Several directors who were against the move at the time have since left the board, these people said.

The conversations accelerated in recent months, according to people familiar with the matter. Mr. Holliday, the former chairman and CEO of chemical company DuPont Co. , started telling other board members that he was ready to move on from the chairman’s role, these people said. On Thursday, he was named chairman of Royal Dutch Shell PLC.

A spokesman for the Charlotte, N.C., bank said the 2009 vote to split the roles of CEO and chairman happened under different circumstances, as the lender was grappling with shareholder frustration over its purchases of Merrill Lynch & Co. and Countrywide Financial Corp.

Another top investor echoed Mr. Buffett’s support. “We think Brian Moynihan has done a great job as CEO and we have no problem with him holding both positions,” said Bill Nygren, who is a partner at Harris Associates, which owns roughly 125 million Bank of America shares, and the portfolio manager of its Oakmark Funds.

The Bank of America spokesman described recombining the roles under Mr. Moynihan as a return to normal, as Bank of America has often had the same person in both positions. Most of the company’s big-bank peers also combine the two roles.

The bank this month also appointed a lead independent director, a popular move among companies wanting to balance the power of the combined chairman-CEO role.

Mr. Moynihan told analysts in a conference call this month that his occupying both roles would be “for the benefit of the shareholders.” He said the bank’s board members were experienced, engaged, diverse and committed to continuing the “good governance” that regulators expect.

Board members talked to corporate governance specialists and had legal analysis done before making the decision, the bank spokesman said. The directors also briefed the bank’s regulators at the Federal Reserve and Office of the Comptroller of the Currency, according to people close to the bank.

Yet some investors said Mr. Moynihan hasn’t earned the right to hold both jobs, noting that Bank of America’s share price has trailed peers like J.P. Morgan Chase & Co. andWells Fargo & Co. The bank has also struggled to raise its dividend as quickly as executives had hoped. Bank of America’s stock is up 13% since Mr. Moynihan took over as CEO. Wells Fargo has climbed 94% and J.P. Morgan Chase is up 43% in that time.

“We feel it’s a backwards step,” said Leon Kamhi, director of Hermes Equity Ownership Services, which advises pension funds that own about 17.5 million shares in Bank of America.

“We are not happy,” said a spokesman for the California Public Employees’ Retirement System, or Calpers, the biggest pension fund in the U.S. “I would not be surprised by a shareholder proposal to reverse.”

Many big companies are moving to separate the chairman and CEO roles. Currently, 53% of companies in the S&P 500 index combine the two, down from 63% in 2011, according to Institutional Shareholder Services’ QuickScore database.

The 2009 shareholder resolution supporting a CEO-chairman split at Bank of America passed with 50.3% approval and attracted support from large investors such as State Street Global Advisors and some T. Rowe Price Associates Inc. funds. Representatives for the investment firms declined to comment. Corporate-governance specialists struggled to come up with another example of shareholders passing a binding proposal, then a company undoing it years later.

Some said the board might have avoided some shareholder outrage by putting the matter to a vote at the next annual meeting, instead of making the decision unilaterally.

“I’ve had enough people call me up about it furious,” said Charles Elson , director of the Weinberg Center for Corporate Governance at the University of Delaware. Mr. Moynihan “bought himself a lot of trouble for absolutely no good reason.”