Debate: What's Next for JPMorgan?
Editor Paula Dwyer and columnist Jonathan Weil met online today to discuss JPMorgan Chase & Co.'s shareholder vote and next steps for the company.
Dwyer: Jamie Dimon just won today's JPMorgan Chase shareholder vote, on whether he should give up his job as chairman. The margin of victory was bigger this year than last. Only 32.2 percent supported a split, versus 40 percent in 2012.
JPMorgan is a giant of an institution with $2.4 trillion in assets and 256,000 employees, and most assuredly needs stronger checks and balances. But I didn't support the split for three reasons. One, it's too easy to game the system by naming a new chairman who would be friendly to Dimon. Lee Raymond would probably have been named chairman, and he wasn't an aggressive presiding director. Two, the problems at JPMorgan are much bigger than who is chairman. And three, the entire board needs overhauling, and the risk committee especially. I may as well add a fourth: The board needs to impose risk limits, preferably by requiring more capital, which would reduce the level of borrowing and thus risk. That's the most immediate need.
Weil: I was surprised the vote came in as low as it did. This has been a recurring proposal on JPMorgan's proxy statements for several years, including Dimon's first year as CEO back in 2006 -- when William Harrison was the chairman, not Dimon. It got 38 percent then, and it didn't get anywhere the attention that it did this year. I would have voted for the split if I were a JPMorgan shareholder, but not because I'm ideological about it like some shareholder activists are. There are some companies where splitting the chairman and CEO jobs doesn't make sense. At this company, it does. JPMorgan suffered quite a bit of reputational damage over the past year, and a new check on the CEO would have been in order.
Dwyer: So now that the vote is over, does this mean the matter is closed? In my mind, the answer is: most certainly not. Some large shareholders, including AFSCME (the public employees' labor union), several big public pension funds, corporate advisory services and governance gurus are not pleased with the outcome. They aren't going to go quietly into the night, but will push even harder for changes if the board doesn't come back with reforms on its own. The disgruntled shareholders are still angry over the London Whale loss of $6.2 billion, as well as the seemingly accident-prone bank's many run-ins with regulators over the last year. More important, they don't think anyone on the board or in management can go toe-to-toe with Dimon. They can't rein him in because they can't take him on. And that's a problem.
Plus, there are many other shoes to drop at the bank. The U.S. comptroller of the currency wants stronger anti-money-laundering controls. The Fed may require more capital. The bank is still defending against charges that it knew or should have known about the Ponzi scheme of longtime customer Bernard Madoff. The Federal Energy Regulatory Commission is looking into whether bank traders manipulated power markets. Lots of activity coming down the pike.
Weil: I agree with you, too, that the board could use an overhaul. How can you have a risk committee, or for that matter an entire board, where the only person with significant banking experience is the chairman and CEO? On to your question, no, it's not closed. I'm sure there are some activists saying, "There's always next year." And keep in mind, 32 percent is a significant number of shares that voted for splitting. Earnings have been stellar, even with the $6.2 billion in losses. But there have been so many run-ins with regulators, as you said -- over compliance with money-laundering rules, internal controls over financial reporting, the Senate hearings, you name it -- it takes a toll. If you're running a bank with trillions of dollars of assets, you can't violate the public's trust and expect there to be no consequences for the leadership.
Dwyer: So Jon, what should Jamie Dimon do now? If he wants to get out in front of this embarrassing incident, he should push to overhaul the entire board. It has seen only two changes since the 2008 crisis, while other large banks have completely remade their boards. And no question the board should fix its risk committee, which knew nothing about the London Whale trades. The members of that panel -- Ellen Futter, president of the American Museum of Natural History; Honeywell International Inc. CEO David Cote; and James Crown, president of Henry Crown & Co., got the smallest number of votes today, yet they each won approval from about 50 percent-plus of the voting shareholders. All the other directors, including Jamie Dimon, got in the 90 percent range.
Weil: It's kind of a trick question, isn't it? If he's able to overhaul and push out a big chunk of the board, it shows he could do it to their replacements, too, which makes him seem all the more dominant. At the same time, from the outside looking in, the board sure looks like it needs new blood. I don't expect any directors who got less than 60 percent of the vote to stay around long.
On another level, as I've said before, I don't believe the chairmanship should have been worth fighting over. The presiding director (Lee Raymond, for now) has almost every bit of authority that the chairman's post has, including the ability to call board meetings. There was a circus atmosphere around this year's shareholder votes; the bank was openly lobbying in the press and behind closed doors, and it had to have been a distraction. If a large portion of the shareholder base wants an independent chairman, I would have liked to have seen him give up the post voluntarily. It's pretty clear now: That just ain't gonna happen.
Dwyer: Should we expect performance to improve? It's hard to argue the bank isn't doing well, with a record $21 billion profit in 2012. The shares are trading today at about $53.45, up about 2 percent from yesterday's close. I think the downside for shareholders was that Dimon might have walked away had the vote gone against him. The bank quietly let shareholders know that was a possibility, giving them reason to worry that their attempts to improve governance might be tantamount to shooting themselves in the foot. In the long run, though, I think JPMorgan has too little capital and borrows too much; that has to change.
Weil: Per the stock price, how about up 68 percent in the past year? In hindsight (wouldn't it be nice if we could pick stocks this way), the perfect time to buy was when Dimon finally began to fess up to the Whale scandal a year ago. I wouldn't argue the bank isn't doing well, but that gets at the real point: Nobody really has any idea how this bank is doing at any given point in time. Earnings are great, but how much of that is because of things outside JPMorgan's control, like central banks continuing to flood the world with liquidity, etc.? As taxpayers we're all on the hook, even if we're not shareholders, which goes to your point about capital and leverage. And what did you think about those threats to quit? Is Dimon really indispensable? If he is -- and I hope he's not and can't imagine that he is -- he's done a horrible job. Hank Greenberg at AIG was indispensable, because only he knew where all of the bodies were buried. Look what happened to AIG when he got tossed out.