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May 08, 2013

ISS, Glass Lewis call for split of chairman, CEO at JPMorgan

Proxy advisory firms are advising shareholders to vote against Jamie Dimon keeping both the chairman and CEO roles at JPMorgan.

A year after belatedly disclosing the extent of its whale-sized trading losses in its synthetic credit portfolio and deficient board oversight of its risk management practices, JPMorgan Chase is facing an all-out proxy battle. It appears likely that shareholder resolutions to separate the roles of CEO and chairman and not re-elect three board members who sit on the investment bank’s risk committee will receive majority approval at the annual shareholders meeting on May 21. The Securities and Exchange Commission ruled against an attempt by JPMorgan to avert a vote on the dual chairman/CEO role.

Proxy advisory firms Institutional Shareholder Services and Glass Lewis have both recommended that the roles of CEO and chairman be separated and that investors oppose the re-election of three longstanding members of the board’s risk policy committee. ISS is quoted by media sources as pointing to ‘material failures of stewardship and risk oversight’ in relation to continuing losses stemming from the so-called London Whale derivatives trades as the reason for shareholders to oppose re-nomination of the three board members.  

The bank’s serious effort to improve risk management and internal controls, undertaken only due to a downgrade and consent decree by the Office of the Comptroller of the Currency (OCC) and pending investigations by the SEC, FBI, CFTC and FDIC, ‘will only be successful if it is complemented by a thorough overhaul of the board’s Risk Policy Committee, starting with the departures of directors James S Crown, Ellen V Futter and David M Coat,’ the Change to Win Investment Group (CtW), which advises union-sponsored pension funds, said in a March 28 letter to Lee Raymond, presiding director of the board.

Glass Lewis took its challenge to the board even further, however, by recommending that shareholders vote against three nominees -- James Bell, Crandall Bowles and Laban P Jackson, Jr -- all members of JPMorgan’s audit committee. The ease with which traders in the company’s chief investment office (CIO) were able to conceal the value of their derivatives positions and hide losses of hundreds of millions of dollars over three months despite internal reviews shows the lack of appropriate controls to protect the company’s assets and income, Glass Lewis said in its report. 

‘We believe the members of the audit committee bear the responsibility for ensuring that the company accounting practices ensure fair and reliable disclosure to investors,’ the report said, adding that members of the audit committee have not satisfactorily performed their duties in this regard.     

There has been an all-out effort by JPMorgan executives and some members of the board to meet with and persuade institutional investors to re-elect current directors and oppose the proposal advocating for a separate chairman, as reported this week by the Wall Street Journal. But the investment banking industry as a whole has come under increasing pressure to separate the roles of chairman and CEO. These roles are combined at all major investment banks except Bank of America and Citigroup. Last month, CtW withdrew its proxy resolution at Goldman Sachs calling for the CEO and chairman roles to be split in exchange for Goldman agreeing to increase the authority of its lead director.  

‘Anybody who is surprised by [the recommendations of ISS and Glass Lewis] has not been paying attention,’ says Nell Minow, co-founder and member of the board of GMI Ratings. ‘The fact that only in the most extreme cases do you get these recommendations should show just how out of touch this board is.’ 

Some investors have been critical of JPMorgan’s risk practices for years, even before the London Whale matter surfaced. CtW first began to communicate its concerns with the board in March 2011 regarding the lack of professional experience in banking, financial trading or financial regulation of risk policy committee members Crown, Futter and Coat.     

If it forces Jamie Dimon to relinquish one of his positions, the company risks losing Dimon entirely, as reported this week by Bloomberg. Dimon said he wouldn’t have taken a prior position leading Bank One if the roles had been separated, seeing a divided board at a company in need of a turnaround as undesirable, according to a recent note from Portales Partners quoted by Bloomberg.    

Despite the growing call to split the CEO and chairman roles at numerous companies, Minow believes it would be a mistake to make a blanket rule against combining the positions.

But, ‘for any company that is going through a difficult set of challenges, it seems an obvious step,’ she says. ‘For a company that is very much in the public eye for its many failures, it’s an immediate step forward toward restoring the confidence of investors.’ 

The fact that shareholders have now had to insist on it says the company still doesn’t fully get it, she adds.    

David Bogoslaw

Associate Editor and Online features producer for Corporate Secretary