Bank of America (NYSE:BAC) still hasn’t cleaned up its act. While the Charlotte, N.C.-based financial services heavyweight recently took the laudable step of adding two more women to its board, all four of the new directors it named are associated with controversial companies. The management’s poor corporate governance puts Bank of America at high risk of experiencing regulatory problems, which continue unabated.
The bank’s financial data gives it an AGR® score of 8, indicating higher accounting and governance risk than 92% of comparable companies. At its highest point during the past three years, Bank of America’s AGR score was a mere 22 in the quarter ended this March.
The financial institution has undergone a number of changes in its senior ranks in recent months. Its vice chairman Charles H. Noski, who had also been CFO during part of 2011, said in August he would leave September 1. After serving for around three years, 68-year-old director D. Paul Jones Jr. did not stand for re-election at the annual shareholders meeting on May 9; the board said it decided not to fill the resulting vacancy and reduced its size to 12 directors effective upon Jones’ quitting. Then in late August the board said it appointed the new directors Sharon Allen, Linda Hudson, David Yost and Jack Bovender effective immediately, “in anticipation of directors who are reaching retirement age and whose terms will expire next spring.” Bank of America’s board membership has increased in the meantime to 16.
The addition of female directors is positive, given that forty percent of the world's largest publicly-traded companies have not appointed even one woman to their boards, according to our latest survey. Credit Suisse also published research this August finding that companies with market capitalization over $10 billion who had women on their boards outperformed those with all-male boards. Of course, women remain grossly under-represented among Bank of America’s supervisors, with only four in total on the board now, but at least the situation has improved.
However, Bank of America could have found additional female supervisors who were associated with more spotless firms. Ms. Hudson is CEO of BAE Systems Inc., the U.S.-based subsidiary of BAE Systems Plc (NYSE:BA) in London, and we named the defence, aerospace and security company to our risk list this February, noting issues such as its corruption-related controversies. Ms. Allen had been a partner at Deloitte LLP since 1983 and served as its chairman between 2003 and 2011; the accounting firm has been involved in scandals such as its April 2005 settlement of Securities and Exchange Commission allegations that it failed to detect a massive fraud perpetrated by Adelphia Communications Corp. and certain members of the Rigas family.
Meanwhile Mr. Bovender had served as chairman and CEO of the U.S. hospital operator HCA Inc. from 2002 to 2009, which the Department of Justice had alleged discriminated against the hard of hearing by failing to provide qualified aids such as sign language interpreters between 2005 and 2008. In another example of how HCA remains embroiled in controversy, the New York Times said this August that an internal investigation by HCA had uncovered evidence as far back as 2002 and as recently as late 2010 showing that some cardiologists at several of its hospitals in Florida were unable to justify many of their procedures.
Mr. Yost, the CEO of AmerisourceBergen Corp. from 2001 to 2011, is also tainted. Two of the pharmaceutical wholesaler’s business units, ASD Specialty Healthcare, Inc. and International Nephrology Network, were named along with the biotechnology medicines company Amgen Inc. in New York Attorney’s Office allegations that the three firms offered remuneration to medical providers to increase purchases of the drug Aranesp. AmerisourceBergen said this August that it didn't expect ASD or INN to admit any liability, but it recorded a $16 million charge for the fiscal year ended September 30, 2011 in connection with its preliminary settlement.
No one will ever know whether the court might have decided in favor of AmerisourceBergen, but that’s not the point. Even after the financial crisis, Bank of America is not addressing every possible angle that might help it recover credibility, and it isn’t choosing board directors who have absolutely no association with past regulatory issues.
Bank of America has also failed to avoid continuing regulatory battles. In a recent example, it is among the handful of major American banks that regulators are investigating for failing to monitor cash transactions and potentially enabling money laundering, according to the New York Times on September 14. In another regulatory matter the previous day, Bank of America had agreed to settle the Department of Justice’s allegations that it discriminated against disabled mortgage applicants who were receiving public assistance, in a filing that noted alleged such conduct taking place between May 1, 2007 and April 30, 2012.
Bank of America denied the Department of Justice’s accusations and said it entered the settlement “solely for the purpose of avoiding costly litigation.” Even if Bank of America is innocent, the firm runs into an unusual amount of trouble with regulators, as we pointed out on August 3. A more spotless board would be a step in the right direction toward preventing such conflicts.
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