Bank Of America And Brand Value

Jun.21.13 | About: Bank of (BAC)

The concept of "brand value" is something that most companies serving consumers understand. Major brands like Coca-Cola, Procter & Gamble, American Express, and even General Motors understand the importance of developing a reputation for product quality, value and fairness when dealing with their customers. These companies actively manage their products and corporate image to develop the value of their brand in the marketplace, cultivating customer loyalty and in turn creating long-term franchise value for shareholders. This lies at the essence of what Warren Buffett refers to when he invests in high quality, brand name companies. (Although Buffett invested in Bank of America (NYSE:BAC) in 2011, I believe he did so because he got such great terms. Note that he has not added to his BAC position since inception, but he has repeatedly increased his Wells Fargo (NYSE:WFC) position, as recently as Q1 2013.)

[Disclosure: We are long BAC and we are engaged in a lawsuit against Bank of America. And we've been grinding axes about this company, its management and its board for the past four years.]

Bank of America's Board and Management Just Don't Get It

Bank of America was recently accused in six affidavits (see links at end of this article) filed in a lawsuit alleging that bank employees were rewarded for delaying and denying Home Affordable Modification Program ("HAMP") modifications so that Bank of America could generate more fees and steer existing borrowers to more profitable in-house products. Additionally, attorney generals from North Carolina and New York are looking into BAC's compliance with the recent industry-wide $25 BN global servicing settlement, adding credence to this story. If true, the recent allegations outlined in a story on NBC news (June 17, 2013) about Bank of America's systematic denial of mortgage modifications for borrowers that qualified under HAMP is demonstration that Bank of America's management and board of directors do not understand this concept of developing long-term franchise value by building a reputation for quality, value and fairness. Fairness includes honesty and integrity. The recent allegations also show that nothing has really changed at Bank of America under Brian Moynihan and the Board of Directors led by Charles Holliday.

The NBC story is based on six affidavits filed by former employees of Bank of America in a lawsuit in Massachusetts. I have read three of the affidavits that I located on ProPublica.org, and links are posted at end of this article. If true, the affidavits are damning, and evidence of unethical behavior and, more importantly point to a corporate culture of not just "short termism," but of outright corruption and a disregard for laws, regulation, and of course, customers. If false, then we have to question why former employees would want to risk their personal credibility and expose themselves to penalties of perjury for false statements. Regardless of whether you believe in the fairness of the HAMP programs to the 90% of borrowers in America that pay their mortgages on time, as a long-term shareholder and owner of Bank of America, I am deeply concerned that this corporate culture of deceit may continue to exist under Brian Moynihan and Charles Holliday's Board of Directors. Where Ken Lewis and his predecessor had created a culture of "yes" men and women, and intimidated (and fired) employees that had the courage to express dissent or question any course of action dictated by the CEO, I frankly had expected much more from this new leadership.

What did I expect?

Bank of America has made great strides in cleaning up its balance sheet and building capital. It is undertaking steps to bring expenses into line with revenues in a less friendly banking and regulatory environment. And its stock may have additional upside, assuming management can resolve outstanding litigation and mortgage put back issues without crippling the company. All that said, this will never be a great company until the corporate culture has changed. Until a culture of honesty and integrity is instilled in this institution - starting from the top management and the board of directors - down to every level of the company, there will continue to be a gap between this company's potential value and its realized value. Until there is a moral imperative to act in the customer's best interests, where managers who fail to do so are disciplined or terminated, this value gap will remain.

Corporate Reputations Matter

Each new headline chips away at the company's image, and damages its standing with customers. As potential customers avoid Bank of America, growth prospects are limited. (see American Banker bank reputation article June 2012) The lack of a strong corporate culture must also impact Bank of America's ability to recruit top flight employees at every level and weaken employee morale.

As a shareholder, I call on Brian Moynihan and the board to investigate these claims made in the employee affidavits and report to shareholders what it has found. I call on every Bank of America director to read the affidavits of these six individuals and challenge them to ask what type of corporate culture exists where the only goal is hitting certain financial targets, regardless of laws, regulations, contractual agreements, much less the associated immorality and human cost involved. A corporate culture where employees work in constant fear of being fired, where openness, dialogue and dissent are not tolerated. I then ask the board to take decisive action to remediate any issues found in the investigation, and begin the process of rebuilding the integrity of senior managers in this company. This means communicating to all employees the value of acting in the customers' best interests, rooting out dishonesty, and explaining how a culture of honesty can build trust, relationships and ultimately long-term franchise value for shareholders.

Appendix:

Here are links to 3 of the Affidavits filed on the Massachusetts Lawsuit from Propublica.org

William Wilson - exhibit 1

Simone Gordon - exhibit 2

Theresa Terfrelonge - exhibit 3

Disclosure: I am long BAC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: We are engaged in a lawsuit against Bank of America. And we've been grinding axes about this company, its management and its board for the past four years.