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