JPMorgan Chase & Co. (JPM) should name an independent chairman and oust three directors, a shareholder advisory firm said, boosting pressure on the bank to overhaul its corporate governance after a $6.2 billion trading loss.
Stockholders should vote in favor of a proposal to split the roles of chairman and chief executive officer, both currently held by Jamie Dimon, at New York-based JPMorgan’s annual meeting May 21, Institutional Shareholder Services said in a report. ISS, which advises investors on proxy voting and corporate governance, cited “failures of stewardship” in opposing the re-election of three risk-committee directors.
Calls for Dimon, 57, to relinquish the chairmanship have mounted since last May when JPMorgan, the biggest U.S. bank by assets, disclosed risk-control lapses in its chief investment office on bets that fueled the trading loss and sparked regulatory probes. The May 3 ISS report could undermine the bank’s efforts to persuade large investors to leave the leadership structure unchanged.
ISS, which also endorsed a proposal for an independent chairman in 2012, added the call to replace directors this year. It cited “the governance failure in connection with the CIO incident, the size and complexity of JPM’s business, and the continued challenges faced by the company.”
The bank’s board urged investors in March to vote against naming a separate chairman, saying that Dimon’s dual role remains the “most effective leadership model.” He has since drawn public backing from billionaire investor Warren Buffett, who has said he personally holds stock in the bank, and Kenneth Langone, the billionaire founder of Home Depot Inc.
Langone, another JPMorgan investor, called Dimon the “finest CEO across any business in America.”
“I love Jamie, I know him well personally, I love him,” Langone, 77, told Bloomberg Television on April 26. The bank reported its third straight year of record profits with $21.3 billion in net income for 2012.
Last year’s losses in the chief investment office were the focus of a probe by the U.S. Senate Permanent Subcommittee on Investigations. The panel said in a March report that the bank dodged regulators and misled investors amid souring bets by trader Bruno Iksil, dubbed the London Whale because his positions were so big. Managers manipulated risk models and pressured traders to overvalue positions in an effort to hide mounting losses, according to the report.
ISS recommended that shareholders oppose the re-election of Risk Policy Committee members David Cote, Ellen Futter and panel Chairman James Crown. Former KPMG International Chairman Timothy Flynn, who was appointed to the committee after the loss disclosure last year, should be re-elected, ISS said.
“The CIO losses revealed multiple points of failure in the risk oversight process, and certain members of the RPC lack relevant industry expertise,” ISS wrote.
Cote, 60, is chairman and CEO of Honeywell International Inc., and Crown, 59, is president of Chicago-based Henry Crown & Co. and lead director of defense contractor General Dynamics Corp. Futter, 63, who joined JPMorgan’s board in 1997, is president of the American Museum of Natural History in New York and former president of Barnard College.
The proxy firm’s recommendation “adds enormous weight to the case for removing these directors,” said Dieter Waizenegger, executive director of CtW Investment Group, which provides advice to union pension funds managing $250 billion in assets, including shares of JPMorgan. “Upgrading director independence and financial expertise is critical if this board is to ask the tough questions of management and the bank’s risk-taking on good or bad days.”
JPMorgan “strongly endorses” the re-election of current directors and disagrees with ISS’s position, said Kristin Lemkau, a spokeswoman for the bank, in an e-mail. “The members of the board’s risk committee have a diversity and breadth of experiences that have served the company well.”
While the bank acknowledged lapses relating to the CIO’s losses, an independent board committee found that mistakes weren’t attributable to the risk committee, she said.
Dimon warned in a letter to shareholders last month that the company was facing more sanctions in coming months.
JPMorgan was notified by U.S. energy-market authorities in March that they may take action against its employees as part of an inquiry into bidding practices, the New York Times reported last week, citing a document it reviewed. JPMorgan intends to defend itself and its executives, Lemkau told the newspaper.
Dimon is scheduled to have a town hall-style meeting in New York this week with dozens of bank examiners from the Office of the Comptroller of the Currency, the Wall Street Journal reported on May 4, citing people briefed on the meeting. It will be held about three weeks after examiners from the OCC and Federal Reserve told Dimon and his board that regulators don’t trust management, the newspaper said.
Investors would risk shortening Dimon’s tenure if they appoint a separate chairman and their company’s stock may lose its “premium valuation,” Charles Peabody, an analyst at Portales Partners LLC, said last month in a note to clients.
Dimon told investors in February that he wouldn’t have agreed to take a previous job, leading Bank One Corp., if the board hadn’t given him both roles, Peabody recalled. JPMorgan acquired Bank One in 2004 to create the company it is today.
“Troubled company, big turnaround, divided board,” Dimon said in February. “Not me. Life is too short.”
If Dimon leaves, “shareholders may just find that the stock loses its premium valuation,” Peabody wrote.
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