Bank of America (BAC) recently announced that it would now require executives of the bank to hold a certain number of shares until one year after retirement, in the case of CEO Brian Moynihan, or until the date of retirement, for all other executives covered under the rule. The bank's CEO will now be required to hold at least 500,000 shares of the bank's stock at least one year after he retires from the bank. The amount of shares that must be held did not change but previously, he was only required to hold them until he left the bank. Now, his shares will be tied up for at least a year after such time that he retires. Importantly, the new rule also includes other senior executives of the bank that were previously exempt from the policy. The covered executives will now have to hold at least 300,000 shares of Bank of America stock until their respective retirement dates. This is important as not only is the CEO better aligned with shareholder interests, but now other senior executives are as well.
The Board of Directors adopted the new policy "in order to demonstrate the alignment of the interests of the Company's executive officers and directors with those of the Company's stockholders." We can all agree that this general policy is a good thing for shareholders but the lengths that BAC went to in order to foster this alignment are encouraging to me.
The problem with any business is that of the principle-agent problem, defined roughly as the trouble with getting an organization's employees (agents) to align their respective goals with that of the organization's management (principle). In the case of shareholders, the agents are management and the shareholders are the principles. BAC's board recognizes this relationship with shareholders and has instituted a policy that will more closely align the goals of the shareholders (principles) and management (agents). BAC's new policy is in keeping with increased "say on pay" policies that have arisen particularly in the banking space since the public outrage of bank executive compensation.
Bank executives and others have been accused in the past of attempting to reap short term gains in net income in order to boost the stock price, only to sell or move on from the company before the repercussions are felt by shareholders. The policy of making at least the most important member of the executive team, the CEO, think about the long term effects of actions the bank is taking is a step in the right direction of eradicating the principle-agent problem in terms of BAC shareholders. Indeed, even making senior executives hold stock until they retire forces them to think about the long term future of shareholders as 300,000 shares is significant money to just about anyone. A byproduct of management seeking out long term, sustainable profit streams is that quarter-to-quarter earnings management will lose its luster, so to speak. If executives are focused on the next 5, 10, or 20 years, next quarter's numbers will seem less important. The company will also take care to avoid risky lines of business or excessive leverage that may cause another blowup down the road.
The point is that this new policy is a step further in the right direction for Bank of America shareholders. Aligning executive compensation with shareholders for the long term, and the case of the CEO, even after retirement, is an overwhelming positive for those interested in holding the stock. The freewheeling, wild west days of Ken Lewis are gone and the grown-ups are back in charge at Bank of America.
With the indexes at or near all-time highs and BAC trading near $12.25, I would wait for a small pullback both in the broad indexes and BAC shares alike. I would not add to an existing position or initiate a new position at these prices because I believe $11.75 to $12.00 will be available in the coming weeks. Even if you are adding to or initiating a long position at current prices, BAC's new compensation policy is yet another step in the right direction for long-term shareholders.