Tuesday, May 21, 2013

Jamie Dimon's Two Fingers to Governance

What is going on at JP Morgan Chase?

Despite the multiple scandals that has plagued the broader Banking sector in recent years and the more recent 'London Whale' trading scandal, where JP Morgan blew billions of dollars of investors money, JP Morgan Bank has spectacularly demonstrated its inability and reluctance to embrace strong leadership and transparency by voting down a proposal to separate the key corporate roles of Chairman and CEO. As to why this proposal needed to go to a vote by shareholders in the first place, says a lot about Jamie Dimon's own personal agenda within the Bank and his rather alarming indifference to best practices in governance. What is he afraid of? What has he got to hide? Why does he not want to be accountable to anyone within the Organisation?

Even undergraduate students that study business studies and corporate governance will know the critical importance for the separation of the CEO and Chairman roles in an organisation. The Board's job is to oversee the performance of management and to hold management to account. How can the Board carry out this function if the Chairman of the Board happens to also be the Head of Management (CEO). Given the Chairman sets the agenda for Board meetings and is the most powerful and influential person on the Board, how can the Board function in any meaningful or effective manner, if the Chairman also happens to be Management's chief representative and defender on the Board.

The fact a publicly listed Bank the size of JP Morgan Chase is even allowed to retain a CEO and Chairman as the same person does not say much for the regulatory authorities in the US. In many countries this would be a breach of governance practice and the Bank would be expected to provide an explanation in its Annual Report for the breach, and to provide details on what it is doing to rectify the transgression. Many of the failings of international banks during the financial crisis had to do with core governance failures and the failure of Boards to rein in management, when risks in the sector began to escalate.

JP Morgan Chase may well argue that it outperformed and outlasted most of its competitors during the Banking crisis, but that does not give Mr Dimon a license to be answerable to nobody and to both manage and govern the bank as he sees fit. If he is truly proud of the job he has done, he would be open to transparency and accountability, and welcome a non-executive Chairperson to evaluate his performance and to report back independently to the Bank's shareholders. Ultimately one has to ask what is the role of the non-executive Directors on the Board of the Bank and if these Directors believe it enhances their corporate reputations to sit on such a dysfunctional Board structure. How effective can the Remuneration Committee be if a member wishes to question the remuneration package afforded to Jamie Dimon? Dare they strike it down? They can hardly revert to the Chair for guidance, or support.

The number one requirement in good corporate governance practice is the separation of the CEO and Chair roles. Any organisation that fails this simple test is a long-term recipe for disaster and should be seen as a significant risk for would-be investors. JP Morgan Chase is an Institution where strong ego wins out over strong governance. Step clear!

Bob - May 22 2013

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