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Feb 08

BofA settlement: Where’s the beef?

Posted by Stephen Taub in shareholdersshareholder acttivismSecurities and Exchange CommissionSarbanes-OxleyMerrill Lynchexecutive payexecutive compensationdirectorscomplianceCFOCEOsbonusesBank of America

Stephen Taub

Bank of America's agreement to pay $150 million to settle SEC charges also includes a bunch of corporate governance goodies designed to satisfy the activist shareholder set.

Matt Quinn , of course, told you all about the settlement when it broke last week. The deal stems from charges that the financial giant failed to properly disclose employee bonuses and financial losses at Merrill Lynch before shareholders approved the merger of the companies in December 2008. Bank of America also said it entered into an agreement to settle charges with the Office of the Attorney General for the State of North Carolina related to the Merrill Lynch merger.

Of course, the proposed settlement will be submitted for approval to the Honorable Jed S. Rakoff of the United States District Court for the Southern District of New York. This is the same judge who last year rejected the original $33 million settlement.

Under the deal, Bank of America must institute seven policies for three years. However, don't get too excited. These provisions are much ado about nothing. None of them will dramatically change the balance of power between shareholders and directors.

For example, one of the seven provisions requires its Chief Executive and Chief Financial Officers certify that they have reviewed all annual and merger proxy statements. Big deal! Section 302(a) of the Sarbanes-Oxley Act already requires a company's principal executive and financial officers to certify the financial and other information contained in the quarterly and annual reports.

The agreement also requires Bank of America to provide shareholders with an annual non-binding "say on pay" regarding executive compensation.  Okay, this is a hot item among the activist crowd.

But, it is actually a pretty overrated exercise. First of all, it is not binding. Second, it just gives shareholders an up or down vote on the compensation table for the five or six named execs in the proxy. Shareholders can't single out one individual and can't single out specific provisions.

The other five requirements are no more onerous:

*Retain an independent auditor to perform an audit of the Bank's internal disclosure controls, similar to an audit of financial reporting controls currently required by the federal securities laws.

* Retain disclosure counsel who will report to, and advise, the Board's Audit Committee on the Bank's disclosures, including current and periodic filings and proxy statements.

* Adopt a "super-independence" standard for all members of the Board's Compensation Committee that prohibits them from accepting other compensation from the Bank.

* Maintain a consultant to the Compensation Committee that would also meet super-independence criteria.

* Implement and maintain incentive compensation principles and procedures and prominently publish them on Bank of America's Web site.

If the SEC wanted to send a very loud message, they might have required the company institute a majority vote policy that requires a director who fails to receive more than 50 percent of votes cast in a director election to actually resign.

Or it could have ratcheted up the proxy access debate by requiring BofA to allow shareholders to nominate directors under certain circumstances.

Or, if it did not want to do that given that the SEC is still mulling its own proxy access proposals, it could have required BofA to reimburse any investor who successfully stages a proxy fight, similar to what HealthSouth Corp. voluntarily agreed to back in October. Activists believe this provision is the next best thing to proxy access and would encourage a lot more meaningful proxy fights.

No wonder most Americans believe Wall Street has essentially not been heavily held accountable for nearly bringing down the global financial system.



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