Shareholder gadflies have been trying for more than a decade to force banks to split the roles of CEO and chairman. The effort has repeatedly fallen short, but three recent developments suggest advocates of change may achieve better results in the long run.
At least five publicly traded banks — including Bank of America and U.S. Bancorp — face shareholder proposals this year to separate the two jobs. Moreover, the proposals demand that chairmen meet the definition of an independent director.
Three new wrinkles may be shifting the dynamic in favor of shareholders. First, U.S. Bancorp will split the two roles in April, although it will still have a nonindependent chairman. Second, the proposal to be put before B of A shareholders stresses that the change should take place the next time a new CEO takes over.
Then there is the aftermath of the phony-accounts scandal at Wells Fargo, where management and the board took hits for failing to rein in unethical sales practices. The controversy put corporate governance issues back on the radar in recent months.
However, companies are still resisting the proposals.
Each of the five banks has recommended that investors vote against them. Recent history suggests management will win. Since 2000, only two of 91 such proposals have been approved at banking companies — at Bank of America in 2009 and KeyCorp in 2012 — according to ISS Analytics in Rockville, Md. Even then, KeyCorp's proposal was nonbinding, and B of A has since recombined the jobs.
It is unclear if the issue will show up on more proxy statements this spring. Several large banks, including JPMorgan Chase, have not yet filed their 2017 proxies.
Only three of the 15 largest commercial banks — Citigroup, Fifth Third Bancorp and Wells — have independent chairmen.
U.S. Bancorp in Minneapolis will separate the chairman and CEO roles next month when Richard Davis retires and Andy Cecere succeeds him as CEO. However, Davis will remain executive chairman with a range of board responsibilities, and the company is not promising to separate them forever.
Still, the idea that companies can move gradually from a combined chairman-CEO structure to separating the roles could gain traction, said Francis Byrd, a corporate governance consultant in New York. It would be a much easier transition if the incoming CEO and chairman knew the situation going in, rather than trying to force an existing CEO to drop the chairman’s title, he said.
“New CEOs, either internal or externally recruited, would need to understand and accept the board's wishes on this issue,” said Byrd, who advises endowments, pension funds and other institutional investors.
A shareholder proposal this year at Bank of America specifically asks that the Charlotte, N.C., company split the leadership roles when CEO Brian Moynihan ultimately moves on. In the proposal submitted by longtime shareholder gadfly Kenneth Steiner in Great Neck, N.Y., B of A’s board “would have the discretion to phase in this policy for the next CEO transition, implemented so it does not violate any existing agreement.”
A similar proposal was submitted last year at JPMorgan; it failed on a vote of 1.9 billion shares against the proposal and about 923 million shares in favor, with about 13 million shares abstaining.
Both U.S. Bancorp and B of A oppose the measures proposed this year.
“The independent directors believe that Mr. Davis's continued leadership of the board will constitute a valuable resource to the board and Mr. Cecere, and will help facilitate a smooth transition of the CEO role,” U.S. Bancorp said in its 2017 proxy statement. Having Davis as executive chairman will also “create a strong bridge between the board and management during the transition.”
When Davis took over as CEO in 2006, for instance, his predecessor, Jerry Grundhofer, stayed on as chairman for an additional year.
U.S. Bancorp did not respond to requests for comment.
Bank of America has been down this road before. In 2009, investors voted to separate the roles when they stripped Kenneth Lewis of the chairmanship in the wake of the financial crisis. Then in 2014, the board combined the roles for Moynihan. Some shareholders revolted, but a majority voted in 2015 to let Moynihan keep both roles after B of A held a special meeting to address that specific issue.
Now, Steiner is again proposing to split the roles. B of A opposes the measure in part because the 2015 vote gave the board the authority to appoint an independent chairman if it deems the move necessary, the company said in its proxy.
A spokesman at B of A declined to comment.
Then there is the Wells Fargo situation.
When Tim Sloan replaced John Stumpf as CEO, following the bogus-accounts scandal, Wells Fargo gave the chairman’s job to Stephen Sanger, a former chairman and CEO of General Mills. The company also amended its bylaws to require both the chairman and vice chairman to be independent.
More company boards, both inside and outside the banking sector, may follow Wells Fargo’s lead if only to protect themselves, Byrd said.
“It used to be that boards thought that smaller issues, something as small as opening a bank account, wouldn’t rise to the level that a board would need to know about it,” Byrd said. Wells Fargo has shown “that it obviously now has risen to that level.”
Beside B of A and U.S. Bancorp, the other three banks facing shareholder proposals this year are the $21 billion-asset UMB Financial in Kansas City, Mo.; the $5 billion-asset Westamerica Bancorp. in San Rafael, Calif.; and the $4 billion-asset CoBiz Financial in Denver.
John Rodis, an analyst at FIG Partners who covers CoBiz and UMB, said the shareholder proposals will fail at both companies.
“Both are well-run banks, and I think the management and board structure at both are fine,” Rodis said.
CoBiz, UMB Financial and Westamerica all did not respond to requests for comment.
Gerald Armstrong, an investor, has presented the proposal at CoBiz for six straight years and at UMB for five consecutive years.
“Imposing an inflexible rule regarding the chairman’s position … could disrupt or impede governance of the company as well as the board’s internal working relationships and decision making process,” CoBiz said in its 2017 proxy. Steven Bangert has been CoBiz’s chairman and CEO since 1994.
Mariner Kemper, who has been chairman and CEO since 2004, “acts as a valuable bridge between the board and management, fosters an atmosphere of inclusion and openness within the board, generates productive dialogue among the directors, and effectively moves the board’s deliberative and decisionmaking process forward while actively building consensus along the way,” UMB said in its proxy. Kemper is also the company’s largest shareholder.
Westamerica’s board has decided it is best to have a combined chairman and CEO to “avoid a duplication of efforts, enable decisive leadership, ensure a clear accountability for the performance of the company, a more rapid implementation of decisions and a consistent vision.” David Payne has been chairman since 1988 and CEO since 1989. He also owns about 3.4% of Westamerica’s common stock.
But other shifts in the corporate governance world also suggest there could be a thawing of attitudes. In the past, large institutional investors would abstain from voting on such proposals, Byrd said. However, within the past five years some of these investors have started talking with gadflies or with activist institutional investors, he said.
Two of the largest U.S. institutional investors, BlackRock and Vanguard Group, declined to comment on this year’s independent-chairman proposals. BlackRock is either the largest or second-largest shareholder at all five banks voting on these proposals this year; Vanguard is among the three largest investors at all five.
Both BlackRock and Vanguard have official policies supporting either an independent chairman or a lead independent director, provided the director meets certain criteria.
Firms like BlackRock and Vanguard “take a case-by-case view,” Byrd said.
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Corrected March 29, 2017 at 9:55AM: Earlier versions of this story and the attached graphic mistakenly said Citigroup has a combined chairman and CEO.