Will Merrill cost Ken Lewis his job?

Ahead of Bank of America's annual shareholder meeting on April 29, proxy agencies and a large shareholder are suggesting the bank's board needs a complete overhaul, including voting out chairman and chief executive Kenneth Lewis. The agencies cite insufficient due diligence and disclosures related to the Merrill Lynch merger.

San Francisco-headquartered Glass Lewis notes that discussions about a combine between the two firms were initiated by Merrill's CEO, John Thain, on September 13, 2008, and agreed by Lewis just two days later on September 15. "At issue are (i) if BoA conducted sufficient due diligence to fully understand the state of Merrill's capital position; (ii) the timing of the public disclosure of Merrill's fourth quarter loss (after the merger was completed), (iii) what [BoA] knew about the Merrill bonus payments and its role in setting them and (iv) why these payments were accelerated," writes Glass Lewis.

Glass Lewis also cites the investigation by the attorney-general for the state of New York, Andrew Cuomo, which revealed a non-public attachment to the September merger deal allowing Merrill a bonus pool of up to $5.8 billion. Glass Lewis questions why the document was withheld from shareholders.

BoA representatives have defended the bank's case to Glass Lewis but the proxy firm continues to advise shareholders vote to against the re-election of Kenneth Lewis, lead BoA director Temple Sloan, Virgis Colbert, Joseph Prueher and Charles Rosotti. The latter three are former Merrill directors who served on key Merrill board committees including compensation, audit and finance. Glass Lewis suggests shareholders hold the Merrill directors responsible for failing to ensure the investment bank had robust risk controls.

"While we are generally reluctant to recommend voting against a sitting CEO, we believe there is sufficient evidence of concerns around the acquisition of Merrill Lynch to recommend voting against Lewis in this case," says Glass Lewis. "Our concerns are not based on the wisdom or folly of the acquisition; that will be determined in years to come...our concerns centre on the lack of disclosure regarding the Merrill transaction and the amount and manner of the bonuses paid to Merrill's employees."

Manhattan-headquartered RiskMetrics Group has also held discussions with Merrill nominees, namely: Temple Sloan; Brian Moynihan, president of global banking and wealth management; and Edward O'Keefe, who is general counsel at the firm. RiskMetrics notes that it asked BoA representatives if invoking the MAC clause was considered. The material adverse change clause, which is common in merger agreements, allows the buyer to walk away from the table if financial conditions at the target substantially deteriorate. BoA responded that Merrill's losses were in line with industry peers. RiskMetrics disputes this, noting that Merrill's losses were a multiple of the losses at both Goldman Sachs and Morgan Stanley.

"The absence of board leadership and a willingness to curb Lewis's penchant for empire building led to BoA's entry into a risky transaction following an abbreviated due diligence process," concludes RiskMetrics.

RiskMetrics is advising shareholders to vote against directors Lewis, Sloan, Jackie Ward, Frank Bramble, Monica Lozano and Robert Tillman. The firm notes the poor oversight of management exercised by the independent directors named and says it is singling out directors in leadership positions who bore the most responsibility for the board's failure, as well as members of the asset quality committee.

Another proxy advisory firm, Proxy Governance, notes: "We remain puzzled why [BoA], which clearly held the upper hand in these negotiations, felt compelled to strike an initial agreement by the close of that September weekend, particularly amid such uncertainty in the financial markets."

Proxy Governance is recommending voting against Sloan and Thomas Ryan, chair of the corporate governance committee which is responsible for CEO succession and director nominations. The advisory firm deems these two particularly responsible for leading the board on issues such as choosing not to disclose to shareholders the "material degradation in the financial position of Merrill Lynch in advance of a December 2008 shareholder vote to approve the acquisition".

On the issue of Lewis, the Virginia-based firm suggests his current role as chairman and CEO be split. Taking a somewhat utopian view of the world, Proxy Governance suggests that financial sector CEOs are encouraged to be risk-takers and that an independent chairman serves as a check on the overall risk appetite of the CEO.

CtW Investment Group, which works with pension funds, has also launched a campaign to vote against Lewis, Ryan and Sloan. CtW cites "the decision to acquire Merrill based on less than 48 hours of due diligence which was insufficient to fully expose the extent of Merrill's financial liabilities" among other reasons. CtW notes that it normally prefers internal succession but in this case it is suggesting hiring an outside candidate to replace Lewis "to restore both investor and regulatory confidence". CtW hosted a conference call for international institutional investors on April 21 to discuss voting against the directors.

Large shareholders are themselves expressing displeasure and are aiming to garner support. Jerry Finger, founder of Houston-based Charter Bancshares which owns 1.1 million BoA shares, is urging shareholders to vote against Lewis who encouraged "reckless and overpriced acquisitions including LaSalle Bank, Countrywide Financial and Merrill Lynch". He also recommends they vote against Sloan and Ward.

BoA competitor Citi had its annual shareholder meeting on Tuesday. A number of shareholders were very vocal about their dissatisfaction with the performance of the bank, but proposals to re-elect board members, which Glass Lewis, Risk Metrics and Proxy Governance had advised shareholders against, sailed through.