Leadership  Activist Investors

How companies like Bank of America are opening their doors to hedge fund activists

by Eleanor Bloxham         September 9, 2015, 1:27 PM

When boards allow their weaknesses to fester, they lay out the welcome mat for shareholders who want to shake things up.

Has Bank of America opened the door to hedge fund activists? It sure looks like it.

Buzzy Geduld, “who owns 2.5 million Bank of America shares as head of New York-based hedge fund Cougar Capital” is already threatening chairman and CEO Brian Moynihan, according to a report from Bloomberg last month. Geduld wants to see the CEO and chair jobs split at the company. “I’d like to see someone from the outside who’s smart enough and strong enough that Moynihan’s going to have to answer to,” the hedge fund manager told Bloomberg. And if Moynihan can’t satisfy the Federal Reserve that he’s fixed risk issues by the end of the month, “I’d call for his head,” Geduld said.

At Bank of America (BAC), like so many other companies across the country, governance and operational weaknesses act like an open invitation to hedge funds. When boards allow these vulnerabilities to fester—or create them themselves—they might as well lay out the welcome mat and say, “Howdy, y’all, come on in.”

A CEO and chair split at Bank of America has been a touchy subject for some time. In 2009, when former CEO and chair Ken Lewis was facing battles on every front, shareholders voted to split the roles. But in October of 2014, the bank’s board of directors flouted the shareholder vote and “unilaterally changed the company bylaws to allow CEO Brian Moynihan to become chairman,” CNBC reported. This May, after shareholder protests and facing no votes on members of the board’s governance committee, Moynihan and Jack Bovender, Bank of America’s lead director, agreed to call a special meeting on Sept. 22 to get shareholder approval for the board’s change.

Making a bylaw change contrary to a shareholder vote can create upheaval. Such a move landed restaurant company Bob Evans in hot water last year with activist firm Sandell Asset Management. Although the board reversed its position, only two of its board members still hold their seats. Michael Pryce-Jones, director of corporate governance at CtW Investment group, says the unilateral bylaw change at Bank of America “undermines Moynihan and is a no-win for the company.”

Pryce-Jones is also concerned about the frequency with which companies are giving hedge funds seats without a say from other shareholders. “Backroom deals are giving hedge funds an outsize influence,” he told me. According to a Wall Street Journal report, “Last year, activists gained board seats at a record 107 companies, 91 of them through pacts negotiated with the companies.” That’s 85% of the time—and Pryce-Jones says there is “a lack of transparency around these deals” that’s unfair to other shareholders.

Some companies even give seats to hedge funds while at the same time opposing proxy access. (Proxy access allows investors with a certain percentage of shares to nominate directors onto the company’s official slate.) Although Bank of America has adopted shareholder proxy access, Pryce-Jones cites Walgreen (WBA)  and Cheniere Energy (LNG) as two companies that cut deals with activists for seats but have refused to implement proxy access for long-term investors. Activist Jana Partners was given Walgreen board seats last year, yet the board opposed an orderly proxy access process recommended by shareholders this year. Carl Icahn was given board seats in August at Cheniere, but at its annual meeting, the board opposed proxy access.

The saga at Bank of America isn’t happening at a great time for Moynihan. The bank’s stock is currently hovering at a third of its 2006 pricing. And Cougar Capital isn’t alone in mentioning performance as an issue. In an Aug. 31 letter to Bovender, giant pension funds CalSTRS and CalPERS announced their intention to vote against the board’s bylaw change. The letter said that “Bank of America continues to be an under-performer” and expressed concerns about the bank’s stress test failures.

Perhaps by October, the Charlotte-headquartered bank will come out smelling like a rose. But the next 30 days are definitely showtime for Moynihan and the board.

Eleanor Bloxham is CEO of The Value Alliance and Corporate Governance Alliance (http://www.thevaluealliance.com), an independent board education and advisory firm she founded in 1999. She has been a regular contributor to Fortune since April 2010 and is the author of two books on corporate governance and valuation.