Views on improving the integrity of global capital markets
13 May 2013

Splitting Chairs: JPMorgan Deals With Shareholder CEO/Chairman Buzz Saw

The 21 May JPMorgan annual meeting is fast approaching, and it will feature a contentious shareowner proposal that calls for the separation of chairman of the board and CEO roles. In this post we will take a look at the corporate governance issue that is dominating the headlines. Should a public company separate the role of chairman and CEO?

Among its main responsibilities, a board of directors is charged with monitoring the officers of the company and representing the interests of shareowners. So it has been pointed out what a serious conflict of interest it is when the head of the board of directors is also the company’s CEO. When a CEO is also chairman of the board, that person is head of the body that is responsible for oversight of, well, himself or herself.

I wouldn’t say that there is never an instance when a chairman or CEO position could be held by the same person, but with the inherent conflict of interest in the dual position, I believe the onus is on a board to prove that the dual role is necessary. In roughly a decade since the enactment of the Sarbanes–Oxley Act of 2002, the proportion of S&P 500 companies splitting these two roles has increased from 25% to 43%.

At JPMorgan, Jamie Dimon serves as the head of the group charged with overseeing his performance. We should also keep in mind that there is no other real banking experience on the JPMorgan board. One director, James S. Crown, has investment experience as president of Henry Crown and Company — a diversified investment firm. But he is not, and never was, a banker.

Too Big to Fail

Consider for a moment that JPMorgan is deemed one of the so-called “too-big-to-fail” financial institutions that can potentially trigger a takedown of other major finance firms and ultimately the U.S. economy, in the absence of a government backstop as we saw during the financial crisis. We dare say that the entire world economy would be at risk if things were to go wrong at any too-big-to-fail institution without a government backstop. No, I don’t think JPMorgan is going to blow up anytime soon, and Dimon proved himself a more adept banker than his peers during the financial crisis. But is it wise to place all that trust in one person when the board that holds Jamie Dimon accountable is run by Jamie Dimon himself?

Too Big to Manage?

There are also concerns that JPMorgan is not only too big to fail but is too big to manage. In 2012, news of the London Whale trades emerged less than a week before the company’s annual meeting — where 40% of shareowners voted to separate the chairman and CEO positions.

The bank has since had a series of run-ins with regulators over issues ranging from money laundering controls to allegations of power market manipulation in California and Michigan. The Office of the Comptroller of the Currency is also considering censuring the bank for failing to conduct adequate due diligence and report suspicions about Ponzi schemer Bernard Madoff.

JPMorgan’s growing list of problems has outshined record profits in the minds of some investors.

Can any person properly oversee a global bank with nearly US$2.4 trillion of assets? Can we legitimately expect Jamie Dimon — or anyone for that matter — to be able to oversee such a large institution and to have foreseen and prevented the London Whale debacle and all of the regulatory snafus of the past few years?

The decision to split the positions of chairman and CEO should be taken on a case-by-case basis, with the onus on a board to prove to shareowners that the combining of roles is necessary due to the inherent conflicts of interest present when any individual holds both positions. The reasons for splitting the roles at JPMorgan appear to be many — the London Whale debacle, the company’s recent regulatory troubles, the bank’s too-big-to-fail status, the systemic risk it poses to the world economy, and the notion that the company itself may be too big to manage.

But if you served as both chairman and CEO of a large U.S. company, wouldn’t you want things to stay as they are? I would. And it would take a board of directors to stand up to me and tell me I was wrong. But if I were in charge of a board that lacks experience in the industry, how likely do you think it is that they would tell me such a hard truth?

 Update (16 May 2013):

A story run by Reuters after we first posted this blog entry revealed that it is generally Jamie Dimon and other executives at JPMorgan who pick members of the board. According to Reuters’ reporting, the JPMorgan board governance committee, responsible for finding new board members, typically relies on management to find director nominees.

This further highlights the lack of banking expertise on the JPMorgan board; it looks as though JPMorgan management may have handpicked a board that is not equipped to challenge management on many of the key strategic decisions of Jamie Dimon and the bank’s other management.

Other banks have moved to add banking expertise to its board in the wake of the financial crisis, but not JPMorgan.


Photo credit: Reuters

About the Author(s)
Matt Orsagh, CFA, CIPM

Matt Orsagh, CFA, CIPM, is a senior director of capital markets policy at CFA Institute, where he focuses on corporate governance, ESG, and climate change analysis. He writes and speaks frequently on these topics on behalf of CFA Institute. His paper, Climate Change Analysis in the Investment Process was named “Best ESG Paper” by Savvy Investor in 2021.

9 thoughts on “Splitting Chairs: JPMorgan Deals With Shareholder CEO/Chairman Buzz Saw”

  1. Doug Chia says:

    You write, “The reasons for splitting the roles at JPMorgan appear to be many — the London Whale debacle, the company’s recent regulatory troubles, the bank’s too-big-to-fail status, the systemic risk it poses to the world economy, and the notion that the company itself may be too big to manage.”

    If these are the reasons you put forth on why the roles need to be split, then are you essentially telling us that splitting the roles could have prevented each of these things from happening and/or will safeguard us from the inherent dangers going forward? If so, then I believe the onus is on a proponents to prove that the split will have some tangible benefit related to these reasons.

    As you know, I think the combined vs. split Chair-CEO debate is mostly about form over substance. However, in the case of JPMorgan, I’m afraid it’s become about much more that the underlying issue. Instead, it’s become the most visible flashpoint in the larger turf battle over who should be in the driver’s seat for major decisions at large public companies. Activist shareholders largely left JPMorgan alone for the past few years, in part because they had other vulnerable banks to go after, like Bank of America, Citi and Goldman Sachs. However, the minute they smelled blood in the water at JPM (blood of the harpooned whale?) they all flocked over. It’s been interesting to watch. I don’t expect much to get resolved on May 21. It will be a major, bloody battle in the larger war over who governs the corporation. I don’t find that kind of thing to be particularly constructive, but it makes for entertaining debates over Twitter!

    1. Matt Orsagh, CFA, CIPM says:

      Thanks for your comment Doug. I always enjoy hearing your opinion on matters of governance. I often agree with your point of view. However, I disagree with your premise that proponents of separating the chair and CEO positions have not demonstrated a tangible benefit to separating the two positions. The tangible benefit is a more accountable CEO. When the CEO and chairman is the same person, there is an obvious conflict of interest. If the board and management can convince me (and more broadly shareowners) that such a conflict is well managed, then I’m fine with the positions being held by one person. I believe the onus is on the board to demonstrate that this conflict of interest is properly managed and does not hinder the accountability shareowners should expect from a CEO and the board.
      In this case it does not appear that such a conflict has been managed well. It is also a matter of debate as to whether the JPMorgan board has the expertise to adequately oversee the company, as no one on the board, save Jamie Dimon, has banking experience.

  2. Marianna says:

    His role should undoubtedly be splitter as A should lead a team whose role is to monitor A’ s actions and performance. Orherwise not only the Bank but A itself becomes too big to fall.
    But this is only part of the much bigger issue: Chase is too big. There is no reason for it to be so big, Its retail service isnot better, its feed lower

    1. Matt Orsagh, CFA, CIPM says:

      Thank you for your comment. The too-big-to-fail and too-big-to-manage issues are definitely intertwined in this instance.

  3. Marianna says:

    It’s fees lower, its investment advising staff more apt, On the contrary, I have found unusual levels of unprofessionality.
    It seems what is left is a situation where the country bears too much risk in the face of a possible big mistake, and there are no additional benefits to compensate (they would be hard to produce. ..).
    Not only Dimon’ s role has to be split; most importantly, the bank has.
    This however, Chase being Chase, will not happen, at least not I’m the foreseeable future or before another financial catastrophe.

    1. Matt Orsagh, CFA, CIPM says:

      Thank you for your comment. The systemic risk issue inherent in too-big-to-fail financial institutions heightens the passions around this issue. It will be interesting to see what happens at the annual meeting on May 21.

  4. Mike Hydes says:

    In my opinion if the ability to set the agenda of director meetings, and the ability to cast tie-breaking votes were taken away, then this question becomes mute. Perhaps the question should be “Should the role of the chairperson be eliminated?”

    Further, I believe the problem with corporate governance is directors no longer “direct” corporations. The C-suite has been become parfor the course in most western coporate governance models. It is a model which mirrors the trend towards concentrating power in individuals that one can see in most western political models. The issue issue of effective corporate governance will not be resolved until this trend is reversed, and corporate directors reclaim their traditional role in todays corporate structures.

    At our firm, our portfolio companies do not follow the c-suite model, we observe the classic corporate governance model. There is no chairperson per se, but the bylaws simply state that the corporate president shall “preside” at meetings of directors and or shareowners. Our corporate bylaws allocate directorships on a proportional basis. Our portfolio companies can have up to 10 directors, with each controller of a 10 percent shareowner interest entiled to nominate a director. We believe our model closely aligns director and shareowner interest.

    Modern public corporations may want to look at adopting a similar structure. But perhaps with a standard 20 member slate of directors, and with directorships being allocated to each controller of a 5 percent shareowner interest.

    A committee of the directors should be responsible for setting the agenda of director meetings. The presiding officer at such meetings simple implements that agenda. The effect of a tie among directors would be the same as the traditional model where the chairperson cast the tie-breaking vote in favor of the status quo.

    In my opinion if these changes were made mandatory for todays public corporations two results over the short term would be:

    1. Large investor groups like ETFs, hedge funds, pension funds, mutual funds etc, would opt to increase their holdings in public corporations up to the 5 percent threshold in order to secure a directorship. This would greatly benefit the interest of the investing public.

    2. A new industry of independent directors would develop to service the need of these large investor groups for competent directors to appoint to these public corporations. I envision some of these directors being freelancers while others would be on staff (in the corporate director department) within some of the bigger firms like Goldman Sachs, BofA, etc.

    When competent directors reclaim there role in actually directing strategy of public corporations, the role of corporate officials will return to one of strategy implementation, like that of a business manager in a franchised business. Corporate officers would simply follow and effect the directors playbook. The effect of this will be the reduction in the compensation of corporate officers over the medium and long term and an enhancement of value to shareowners.

    1. Matt Orsagh, CFA, CIPM says:

      Mike,
      Thanks for your comment. You’re right, the Western board concept with concentrated power in a CEO isn’t the only model. It will take institutional investors to exercise more authority to get to something like what you are suggesting — but with ”say on pay” and majority voting debuting in the U.S. recently, investor voices have grown somewhat stronger on governance matters. Boards are now more conscious of their responsibilities than a decade or so ago when I first got into the governance game.

      I’d be interested to see a few public companies adopt a model close to what you suggest and see what investors think — I would think they’d be pleased at the board structure. Will anything like that come to pass anytime soon? We’ll see.

      1. Mike Hydes says:

        Your welcome Matt!

        You know, I am thinking that Ms. Denise L. Nappier, of the Office of the Connecticut State Treasurer (and others in a similiar position), maybe interested in advocating for such a corporate structure.

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