How Jamie Dimon Became a Risk Factor
The annual 10-K report that JPMorgan Chase filed with the SEC in February includes a 13-page section on "Risk Factors." It's a lawyerly, exhaustive, exhausting rundown of all the things that could possibly weigh on the earnings of a giant global bank, from regulatory changes to loans going bad to a liquidity crisis to the possibility that "one or more of its employees causes a significant operational breakdown or failure." What's missing, though, is something like this:
CEO Risk: Much of JPMorgan Chase's excellent performance relative to its peers in recent years can be attributed to its Chairman and CEO, who has proved to be a uniquely valuable combination of careful risk manager and hard-driving business leader. He won't be around forever, though. In fact, he has threatened to leave if shareholders vote (non-bindingly!) to strip him of his Chairman title. The Corporation's post-Jamie-Dimon future is extremely uncertain.
The shareholder proposal to split Dimon's job is to a certain extent silly. As Ben W. Heineman, Jr. wrote here last week, JPMorgan Chase already has a pretty formidable de facto chairman in lead outside director Lee Raymond, the former CEO of Exxon Mobil. The evidence on whether splitting the chairman and CEO roles improves performance is mixed; when done under shareholder pressure, according to the University of Minnesota's Aiyesha Dey, it may actually hurt.
Also, there's a lot of confusion out there as to what the job of corporate chairman is supposed be. Roger Lowenstein stated on HBR.org that it's to keep an eye on the CEO on behalf of shareholders. In a similar vein, Eliot Spitzer told Bloomberg Businessweek that, "Even if the leader is spectacular, we want checks on power. We might accept that Thomas Jefferson was a remarkable president, but that doesn't mean we repeal checks and balances."
Those are both somewhat dubious assertions. Do we really want to subject our CEOs to the same checks and balances as our political leaders? A big part of the attraction of the corporate structure is that it allows for both quicker and more-long-term-oriented decision-making than the political process tends to produce. Corporations resemble dictatorships more than democracies — and that's not necessarily a bad thing. Also, the chairman and the rest of the board are by law responsible not just to current shareholders but to the corporation, meaning they're free to take into account the concerns of employees, creditors, customers, and other stakeholders. This is of particular import at a giant bank like JPMorgan Chase, where bondholders, depositors, the Federal Deposit Insurance Corp., and U.S. taxpayers together have far more money at stake than shareholders do.
Still, chairman and CEO are different jobs, and it is worth asking if Dimon (or Raymond, if you prefer Heineman's version) is performing the first adequately. The chairman's duties — other than presiding over meetings and signing stuff — aren't defined with much precision in JPMorgan Chase's corporate bylaws. But the board of directors, with the chairman at its head, is responsible for determining the corporation's long-term goals, for positioning it for the future, for making sure that its fortunes can withstand a change in CEO. It's not clear that JPMorgan Chase's board has succeeded at this. As pseudonymous investment banker The Epicurean Dealmaker recently wrote of Dimon,
He has failed to accomplish one of the most important, difficult, and basic tasks a Chairman is supposed to do: establish a succession plan for the CEO. Each and every Board worth its perks and compensation should make finding and grooming successors to the firm's current senior executives — especially the CEO — its most important agenda item. Not only has Jamie failed at this, he has actively fired key lieutenants and potential successors like Bill Winters and Steve Black, apparently on the basis that they posed too credible a threat to his own power.
There are corporations where the chairman and CEO jobs are held by the same person that do a great job of succession. General Electric, where Heineman was senior vice president for law and public affairs, is one obvious example. But GE is a company with a well-established culture and a history of well-executed transitions. JPMorgan Chase is a relatively recent amalgam of three giant banks, two of which — Chase and Bank One — were themselves products of merger after merger after merger. The surviving corporate entity is actually Chemical Bank, which merged with Chase in 1995. And in the midst of the financial crisis, JPMorgan Chase added most of the operations of another giant, failed thrift Washington Mutual.
That Dimon, who had only been at Bank One for four years when it merged with JPMorgan Chase in 2004, was able to steer this ungainly creature safely through the financial crisis was a spectacular accomplishment. Unlike at Goldman Sachs, where risk savvy has long defined the corporate culture, JPMorgan Chase's ability to avoid company-threatening risks in the years leading up to the financial crisis can be chalked up largely to its CEO. This accomplishment alone makes Dimon perhaps the greatest banker, and one of the greatest chief executives, of his generation.
Such a CEO, though, is most likely a one-of-a-kind phenomenon — and a good chairman should be focused on the risk of what happens when he's gone. This is about more than just succession planning. What JPMorgan Chase really could have used after the crisis was for its board and chairman to define what the company stood for and what made it unique — and to help shape the environment in which it operated to favor a less crisis-prone variety of financial capitalism. Dimon seemed perfectly positioned for such a transformative role. He had unparalleled credibility, a happy shareholder base, and an apparent understanding that certain aspects of how banks operated in the 1990s and 2000s were neither healthy nor sustainable. He could have easily pushed for the kind of bold changes in executive pay and other practices that Sallie Krawcheck recommended in her HBR article "Four Ways to Fix Banks."
But he didn't. It's a little hard for an outsider to tell how hard Dimon has tried to reshape his bank and his industry since the crisis, and even how much headway he has made. But the superficial impression — reinforced by the current fight over his job titles — is that while he has continued to be a very good chief executive ("London whale" notwithstanding), Dimon has not succeeded in making himself dispensable.