The Curious Case of Bank of America's Ken Lewis

Tomorrow BofA CEO Ken Lewis goes on trial. The annual shareholder meeting has become a referendum on the decisions, and legacy, of Ken Lewis. Let’s parse the data.

Why He Should Stay as CEO

1. Who else is there?
2. Paulson and Bernanke came at him with a baseball bat in a dark alley – what choice did he have but to buy the much-maligned Merrill Lynch?
3. Up until September 2008, Lewis was a seen as a star of the banking industry, even winning the “Banker of the Year” honors from American Banker.

Why He Should Be Removed as CEO

1. Despite the Paulson-Bernanke takedown, Lewis did not have to make the Merrill deal. The simple truth is that he wanted this deal, badly, to demonstrate to the world that BofA was king of the hill, and just as importantly, that he could go one better than his mentor, former BofA CEO Hugh McColl. To Lewis, Merrill was a dream of a company, one that had an enormous emotional attachment for him personally. McColl never acquired Merrill; Ken Lewis did. Wow!
2. How many lives should one CEO have? Countrywide; Merrill; TARP lifelines; the John Thain debacle; testimony to Cuomo that may yet land Lewis in more trouble than even he could imagine; first quarter earnings chock full of one-time gains based on increasing the valuation of toxic assets on the book; characterizing these results as evidence of “a testament to the value and breadth of the franchise;” outraged shareholders and institutional investors who finally have had enough; news that Treasury stress tests indicate BofA needs more capital, yet again. By my count, that makes 9 lives…

The Bottom Line

I don’t know Ken Lewis personally, and I have no reason to believe he is not a good person. But, the evidence is now overwhelming that Ken Lewis is an incompetent CEO. What shareholders and the board cannot, or will not, do, Ken Lewis should do for himself. The one solution that will be best for Bank of America, and best for Ken Lewis and his personal dignity, is clear. He should resign.

You may say I'm a dreamer, but (perhaps) I'm not the only one.

What Won’t Happen Today at Citi's Annual Meeting

1. The board won't get fired.
2. CEO Vikram Pandit won't get fired.
3. Citi won't announce a workable turnaround plan.

That's 0 for 3, Cody Ransom numbers.

Let's look at the board's track record. Enron, booted out of Japan, all you can eat sub-prime, Chuck Prince, Vikram Pandit. In baseball, it takes three strikes to be out; for the Citi board it looks like five strikes (and counting) won't be enough. The irony in all this is that on paper board members have great experience - Armstrong at AT&T, Belda at Alcoa, Mulcahy at Xerox, the list goes on. But, and this is the big but of corporate governance, just slapping down your resume on the boardroom table does not make an effective director. Actions speak much louder than resumes, and it's hard to imagine the Citi board did what great boards do - ask the tough question, probe top management, spend the time to really understand the company's business, and not defer to the "superstars" on the board (read: Robert Rubin). I really hope the new directors about to be officially seated get the principle that spectacular resumes (former CEO of US Bancorp, etc.) are not enough.

As for Vikram Pandit, the jury is in. It was not his fault that Citi made as many gigantic blunders as they did (he only started as CEO in December 2007), but he has got to bear responsibility for Citi's inability to come up with a viable turnaround strategy. More to the point, I find it hard to believe that he is the most qualified person to be CEO of Citi. Remember how he got the job? His hedge fund was acquired by Citi, and with all due respect to my friends in the hedge fund business, that is not the best training ground for the job of CEO in a complex, struggling company. That the hedge fund imploded not long after Citi bought it only adds to the ignominy.

Which brings us to the problem of creating a new strategy to fix the bank. Q1 earnings were driven by accounting changes, rumors of big paydays driven by AIG's winding down of credit-default protection, and the simple beauty of borrowing at 0% and lending (or investing) at 4%-12%. That is not sustainable, especially in light of the quickly melting commercial real estate market. Navigating around these curve balls is not easy for any management team and board; for Citi's, I fear it's just about impossible.

Hey, isn't Treasury all about good corporate governance? What's good enough for GM's board is surely good enough for Citi's.

Sun and IBM, Yahoo and Microsoft: Learning From Mistakes?

Like Yahoo, like Sun. Yahoo rejects a tremendous buyout from Microsoft last summer, and the stock tumbles. Total drop in market cap: $30 billion. This week, Sun rejects a tremendous buyout from IBM and the stock tumbles. Total drop in market cap: $2 billion and counting. Aside from the mysterious fact that both companies, and both boards, have walked away from a huge premium, what else is going on here?

The answer is a nutshell is “attachments.” Attachments to people, places, and things are among the most powerful emotional drivers of action, sometimes leading reasonable people to make huge mistakes. Think Bernie Madoff and his unfortunately legion of followers who needed to know “the right people” to be given a chance to invest with the man that churned out 10-12% returns in good seasons and bad. No one (or hardly anyone among his investors) asked any questions – crazy Bernie was one of us, a man to be trusted.

Well, the attachments at Yahoo, and now Sun, are not of the same pedigree, but certainly of the same ilk. At Yahoo, founder and then CEO Jerry Yang built the company into a Silicon Valley legend, thumbing his nose at Microsoft’s hegemony in the process. To then turn around and sell your baby to “the evil empire” was just too much, regardless of price. Keep demanding more, and even a deep-pocketed Microsoft will take its chips and go home.

Enter Sun. Built by Scott McNealy, Sun was an original that prided itself on its independence. Relegated to the board while Jonathan Schwartz took the reins as CEO, Scott could do little harm, until now. Leading the boardroom revolt, McNealy and his faction of directors upped the ante on IBM (and CEO Schwartz in the process), driving the big bidder (close to $10 a share, a 100% premium when offered) away. Founder McNealy, like founder Yang, too attached to the companies they built to imagine selling to the industry winners. And shareholders lose, again.

GM’s New Board – Calling Gates, Gerstner, and Grove

There’s been lots of chatter about GM’s board of directors walking the plank, and the unprecedented role of the federal government in prodding reportedly six directors to find another country club to latch onto. The news stories have been about whether the board deserves this fate – of course they do! – and whether and how the Obama Administration is stepping far beyond the line any US government should go – I’m concerned, but see this as legitimate. The problem with this debate is that the first question is just plain silly given the track record of the company, and the second question quickly gets mired in ideological posturing.

Lost in all this is the real story, or at least the story that has the potential to make the biggest difference not just at GM but at many other companies as well. Erin White at the WSJ wrote a story after talking to me about this the other day, but I think the story is even bigger than GM. The new GM board has the potential to remake corporate governance in America. Think about it – who is going to accept a board position at GM with Treasury riding shotgun? The “been there, done that” crowd of ex-CEOs who make a living on the corporate governance trough will want no part of this assignment given the scrutiny they will be under. Better to lay low in boardrooms that value business as usual. Perhaps paradoxically, the most likely candidates for the GM board are business stars who don’t want to take on “yes-man” roles, and who would only jump into the GM fray if they had a big opportunity to make a difference.

And what a difference they could make. Imagine a proven business builder like Bill Gates, accomplished executives like Larry Bossidy, Jack Welch, and Lou Gerstner, or Silicon Valley iconoclasts like Andy Grove who would simply refuse to accept the status quo. Leaders who have demonstrated the vision and creativity to remake enterprises, and industries. A new board like this will insist on being hands-on, asking the difficult questions but also helping to generate some of the answers. The buzzwords on the board will go from illogical incrementalism, a fixation on pay packages, and a “we can’t do that at GM” mindset to one driven by creativity, innovation, and breaking the rules. And as the song goes, if they can do it here (at GM), they can do it anywhere.

A pipedream? Perhaps. But also an opportunity for real leaders to step up to a mega-challenge that can not only help turn around a once-great company like GM, but set a new standard and expectation for how corporate governance can, and should, work in America.

Meet GM's New Board of Directors – The Government

With the news that President Obama’s task force is sending (very) tough love out to GM and Chrysler, taking down GM CEO Rick Wagoner and the board of directors in the process, the parallels (or lack thereof) with GM’s own board of directors is stunning. Look what the task force has said about GM’s turnaround plan:

(1) Projections of slowing market share declines are way too optimistic given past history and plans to shutter more brands;

(2) Expectations on the profitability of GM cars is overstated given market conditions, quality image problems, and plans to make smaller and hybrid vehicles (which generate lower profits);

(3) GM’s European business has been losing money for a decade, yet the company wants to invest more capital there;

(4) The company is far behind in manufacturing fuel-efficient cars, and their hail-Mary (my words, not the task force) known as the Chevy Volt is a sure loser given its uncompetitive cost structure;

(5) Despite all this, to meet its legacy obligations GM will need to sell almost one million more vehicles.

The upshot of all this is that GM is almost certainly not going to return to profitability following the content, and pace, of their current turnaround efforts. And so the $64 billion question is this: Why did GM’s board of directors not deliver these harsh, but probably realistic, assessments to the management team? Why did the board allow GM to make a series of disastrous decisions for years? Why did the board stand by while one of the greatest names in American business fell apart?

The answer is that GM’s board did not take it upon themselves to set the highest of standards, did not carefully question and challenge the management team’s turnaround strategy and progress toward their goals, and did not behave in the highly vigilant manner required to fulfill their fiduciary responsibility to shareholders. Elsewhere I have suggested specific actions vigilant boards must take, and I have written about the types of biases that can push smart leaders to make bad decisions, and all are in evidence here.

This is a scandal of the highest order, but alas, it is a story repeated at Bank of America, Citigroup, AIG, and many other companies. So, while free market economists wring their hands in disgust at the extraordinary interventions of the Obama Administration, I for one say, it’s about time somebody paid attention. It’s about time there was effective vigilance and oversight of GM. And I hope other boards pay attention – what is our state of corporate governance such that the government does a better job of providing advice and oversight to managers than a so-called independent board of directors?