BofA shareholders launch coup d'etat

A big day for corporate governance

An amazing thing happened at yesterday's shareholder meeting for Bank of America. Ken Lewis, the man who has presided over the financial behometh since 2001, was effectively voted out of office as Chairman of the Board of Directors. The move came as shareholders narrowly approved a motion to split the chairmanship from the CEO. The vote won by a narrow margin: 50.34% in favor vs. 49.66 against. It was a bad day for Ken, but a great day for shareholders.

This victory may seem like a total non-event to some of my readers, but I find it to be very significant. As I see it, one of the most pressing problems in corporate America is the breakdown in corporate governance.

Consider how corporations are supposed to be governed. Shareholders - the owners of the company - elect a board of directors to look after their interests.  Under the leadership of the board's chairman, the directors hire managers who they think will best manage the enterprise. The directors then hold management accountable to act in the interest of shareholders.

Now think about what happens when one person is both CEO (the lead manager) and the Chairman (the leader of the directors.)  Who does that person really represent? Where is the incentive? It seems to me that the natural result is for that person to think most about his own personal interests. There is no longer any check or balance on him. Could that be why executive compensation has gone so far out of control? Is it possible that scandals such as Enron, Worldcom, Healthsouth, etc. are on the rise because boards have been compromised by a blurring of the lines between directors and management?

I know this victory was narrow. It is impossible to call this a sea change or to construe any sort of a mandate from it. But it gives me hope that maybe the economic crisis will help shareholders wake up to the fact that these roles should be split between two people. And then maybe boards will start to hold managers accountable for shareholder interests.