June 22, 2018
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Demoting Jamie Dimon won’t fix JPMorgan’s poor governance

JP Morgan Chase and Co. CEO Jamie Dimon gestures during the U.S. Senate Banking, Housing and Urban Affairs Committee hearing on Capitol Hill in Washington, in June 2012. Dimon appeared to be headed for a victory in a shareholder vote on whether he will keep his dual roles as chairman and chief executive of the largest U.S. bank, according to reports on Tuesday.

Should the board of JPMorgan Chase force Jamie Dimon, the bank’s chairman and chief executive officer, to give up one of his jobs? Governance watchdogs, shareholder advisory services and public pension funds say yes. Other large shareholders, some prominent academics and the bank say no.

We agree that JPMorgan, a giant of an institution with $2.4 trillion in assets and 256,000 employees, needs stronger checks and balances. Yet we disagree that the only — or even best — way to achieve this is by forcing a demotion on Dimon. There are other means to this end, including regulatory demands for more capital to make JPMorgan safer.

It’s worth remembering that there are plenty of examples of blowups at companies with separate chairmen and chief executives — Enron, HealthSouth and WorldCom come to mind. Meanwhile, Wells Fargo, one of the world’s best-managed banks, combines the chairman and CEO jobs.

What matters more than separating the top titles, the level of board independence or the willingness of directors to show up for meetings is a director’s willingness to question management. Although Congress and the stock exchanges have tried, no law or “best practices” guide can instill that commitment.

The arguments in favor of separation begin with the intuitive: Overly concentrated power in one individual is rarely a good idea. A CEO is supposed to lead the management team. The chairman, along with the rest of the board, should set targets for management and oversee their execution, without day-to-day involvement.

Yet academic research doesn’t support the notion that separate chairmen and CEOs benefit shareholders. Splitting the two may even be harmful. A recent study out of Indiana University found that the shares of low-performing companies benefited when the chairmen and CEO jobs were split. The opposite was true for high-performing companies: The shares were often hurt by separation.

On the other hand, GMI Ratings, which evaluates governance risk, found that CEOs who wear both hats are more highly compensated and more closely associated with risk indicators than their CEO-only counterparts.

Clearly, there is a need for more study and better data. Only about 20 percent of companies in the Standard & Poor’s 500 have truly independent chairmen, leaving researchers with little to go on. The lack of evidence may also rest with the fact that, when the two roles are split, the change is often cosmetic. Some chairmen, for example, are former CEOs or have other ties to management that cancel their neutrality.

Which brings us back to JPMorgan. The bank Dimon has run since 2005 may be too large for any individual to handle. One indication, as Bloomberg Businessweek pointed out, is the large number of regulatory and legal matters the bank is fending off. The litigation section of its quarterly report takes up 18 pages.

The U.S. comptroller of the currency has been critical of the bank’s anti-money-laundering controls. The bank agreed to pay $88.3 million in 2011 to settle claims it violated sanctions against Cuba, Iran and Sudan. It is still defending against charges that it knew or should have known about the Ponzi scheme of longtime customer Bernard Madoff. The Federal Energy Regulatory Commission is looking into whether bank traders manipulated power markets. And then there is the so-called London Whale credit-derivative transactions, which caused the bank to lose $6.2 billion.

Rather than hold a referendum on Dimon, shareholders should take advantage of JPMorgan’s annual elections for its entire board. If they have concerns, they should push for a housecleaning by nominating a new slate of aggressive directors. Dimon’s board has seen just two changes since 2008. Bank of America and Citigroup, meanwhile, have overhauled theirs since the crisis.

Shareholders would also do well to create a true lead director, one who makes sure the board has complete access to management and internal documents, decides when to meet and what’s on the agenda, and demands real explanations over trite answers.

If we had to boil down the chairman’s job to one basic goal, it would be to create value for shareholders. Dimon has delivered on this score: JPMorgan remained profitable during the financial crisis and last year had a record $21 billion in earnings. The question shareholders should ask is whether he can sustain that performance as the bank continues to grow and gain market share. Unless the bank borrows less, raises more capital and takes fewer risks, that will be difficult — regardless of whether Jamie Dimon has one job or two.

Bloomberg News (May 21)

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