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Sep 10, 2013

Governance makeover at JPMorgan limits Dimon's authority

Creation of a new Lead Independent Director role with expanded oversight of CEO functions comes as the bank faces enforcement actions from federal regulators

Jamie Dimon may have prevailed against shareholder activists in a proxy fight to separate the chairman and CEO roles at JPMorgan Chase’s annual shareholders meeting in May only to suffer the greater indignity of having his authority reined in by the board a few months later.

On September 9, JPMorgan Chase said its board will elect two new directors and further enhance its corporate governance principles by establishing a new Lead Independent Director position, to be filled by current Presiding Director Lee Raymond with substantially expanded responsibilities.

The Lead Independent Director role ‘includes a number of important responsibilities and authorities, many of which codify existing best practices of our Board,’ JPMorgan said in its news release. Among those expanded powers are the authority the Lead Independent Director will have to:

  • call for a full board meeting at any time, not only a meeting of the independent directors, as is currently the case
  • preside over meetings when the CEO is conflicted, not only when the CEO is absent
  • approve the board agenda for a meeting and add agenda items
  • facilitate communication between management and independent directors
  • guide annual self-assessment of full board.

But there are four additional points that clarify the board’s intention to increase its oversight of management and restrict Dimon’s role as chairman: the authority of the Lead Independent Director to guide annual performance evaluation of the chairman and CEO, guide full board consideration of CEO succession issues, guide full board consideration of CEO compensation and meet one-on-one with the CEO after every regularly scheduled board meeting.

Raymond, who himself filled the dual role of chairman and CEO at ExxonMobil from 1999 to 2005, will have even more formidable stature as a result of the company’s determination that the board will no longer rotate the Lead Independent Director position every year. Other governance enhancements entail making directors, including the Lead Independent Director, available for consultation with major shareholders and other constituencies, and arranging for executive sessions (without company management) to occur at every regularly scheduled board meeting.

The two new directors will be Linda Bammann, chief risk management officer at Bank One Corp from 2001 until its acquisition by JP Morgan, who will be elected to the board on September 16, and Michael Neal, who is slated to join the board in January 2014 after retiring as vice chairman of General Electric Co. at the end of 2013.

The governance makeover comes as JPMorgan awaits enforcement actions and fines from the US Office of the Comptroller of the Currency and the Consumer Financial Protection Bureau, following extensive and well-publicized investigations.

It’s fair to wonder whether the changes are part of an effort by the banking behemoth to convince federal regulators of its commitment to tighten its governance protocols in the wake of a $6 billion trading loss in its London office and myriad questions about its treatment of consumers during the recession. Under the terms of regulators’ civil orders, JPMorgan will have to own up to its internal flaws and might have to pay at least $80 million in fines, as reported by the New York Times on August 27. 

CompliancEx, a compliance and regulatory risk online forum, noted a newfound conciliatory stance by the company starting in July when it agreed to a $410 million settlement with the Federal Energy Regulatory Commission for allegedly scheming to transform ‘money-losing power plants into powerful profit centers.’

Bammann’s most recent experience as a director of the Federal Home Loan Mortgage Corporation (Freddie Mac) from its entry into conservatorship in late 2008 to July 2013 will come in handy as JPMorgan confronts civil and criminal probes in California of its mortgage business during the financial crisis, as well as likely fines from the Federal Housing Finance Agency, which has accused JPMorgan and 17 other banks of selling mortgage securities that eventually collapsed.

Neal’s responsibility as chairman and CEO of GE Capital from 2007 until June 2013 capped 26 years at GE Capital in a variety of senior operating positions and will likely be useful as the board seeks to tighten controls of the bank's sprawling operations.