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It’s never easy to guess what what “the last straw” will be in corporate governance. Boards of directors and American shareholders are a compliant lot and they would rather lose millions, or even billions, of dollars, than vote out a sitting CEO.

Many reasons have been suggested for this. Frequently-cited is the “Costly Firing” explanation – finding a good CEO is hard; interruptions in leadership, especially during a crisis, can exact serious penalties; the new person might be worse - better the devil you know that the devil you don’t; firing a CEO could give the wrong signal to the market and send the stock plummeting, plus there will probably be a big severance package to pay and even the risk of legal action.

An alternative explanation for CEO entrenchment is the old-boy network - executives and fat cats looking out for each other, often with the knowledge that the board is complicit in the various decisions that drove a company into a wall.

But either way, sometimes enough is enough and tomorrow’s Bank of America shareholder’s meeting will be interesting.

I started buying Bank of America about a year ago when it was around $40/sh and paying a fat dividend. Over the years I’ve done well buying strong companies in wounded industries. On the day the markets opened after 9/11 I bought Southwest Airlines, for instance. And Bank of America was a pretty strong bank, and well-positioned, so I bought more as it fell.

But then a funny thing happened. Last September, with Wall Street firms falling to the ground like autumn leaves, Bank Of America acquired Merril Lynch, virtually overnight. An article in the January 28, 2009 issue of Business Week reported that BofA had only 24 hours to review Merrill’s books - and this with a staff called in at 2AM after working a 14-hour day on another crisis.

Last week the reason for this became clear. In testimony to investigators from the New York Attorney General’s office looking into fishy bonus payments, BofA CEO Ken Lewis said that he was pressured by Hank Paulson and Ben Bernanke to make the purchase - and to keep quiet about his reservations.

Let’s reflect on that for a moment. Under law, a CEO is required to disclose to shareholders any information that might materially affect the value or prospects of the company. Not only did Lewis break the law, but according to his testimony he was urged to do so by the two most senior government officials involved in the US economy - the heads of Treasury and the Fed. For the record, both deny that they urged Lewis to cover-up.

But now that Lewis has admitted in sworn testimony that he failed to meet his legal obligations and that he bought a company that he suspected would drag down shareholder value, I cannot fathom why we should keep him on. I proxy-voted my shares against him for the chair a month ago, before the latest news,  and several major institutional shareholders have since indicated their intention to vote against him tomorrow. If he survives tomorrow it’s likely the lawyers and prosecutors will get him before long anyway, but the sooner BofA starts its spring cleaning the sooner it can get its house in order.

( artwork copyright © Peter Nelson )