Way back in 2011, JPMorgan Chairman and CEO Jamie Dimon was on top of the world. TIME selected him as one of the 100 most influential people in the world, and even Charles Ferguson, director of the scathing, anti-Wall-Street documentary Inside Job praised his performance during the financial crisis:
“Dimon had the wisdom and the long view to prevent his employees from succumbing to the insane greed that enriched so many bankers while destroying their firms, not to mention ruining millions of lives. As a result, JPMorgan caused far less damage during the financial crisis and emerged more powerful than ever, while Bear Stearns, Lehman Brothers, AIG, Countrywide and WaMu collapsed. For this, Dimon deserves enormous credit.”
Less than a year later, Dimon suffered one of the most humiliating setbacks of his career, when the so-called “London Whale” trades cost the firm approximately $6 billion, and shook Wall Street’s faith that Dimon was adequately managing risk at his too-big-to-fail bank.
Dimon did as a good a job as anyone could to reassure the markets and public of his and his firms’ competence. He even went down to Washington to show his contrition and submit himself to a Congressional inquiry into the matter. And for the most part it was effective. The media firestorm over the trading debacle ultimately settled down, and JPMorgan’s stock price has recovered from the deep hit it took following the loses.
But Dimon isn’t quite out of the woods yet. Due in part to the London Whale mess, shareholder advisory firms like Institutional Shareholder Services and Glass Lewis are recommending that JPMorgan shareholders vote to split the roles of CEO and Chairman, and hand the Chairmanship over to another director — effectively demoting Dimon, though he would remain CEO of the bank. Meanwhile, according to The Wall Street Journal, JPMorgan directors are lobbying their biggest shareholders like Blackrock, Vanguard, and Fidelity to vote to keep the positions merged.
It’s worth noting that in the grand scope of these things, $6 billion is pocket change for bank like JPMorgan. And it is arguable whether or not Jamie Dimon, as CEO of one of the largest financial institutions in the world, can be on top of every trade, or prevent every screw up at the bank. To my eyes, the London Whale disaster was more proof of the need for stricter capital requirements at banks than it was an indictment of Jamie Dimon’s performance. It’s inevitable that CEOs and banks are going to screw up from time to time, so let’s just make sure the taxpayers aren’t holding the bag when it happens.
But whether or not you believe the London Whale incident proves Dimon’s incompetence, there is still the question of whether anybody at any company should hold the joint role of CEO and Chairman of the Board. After all, the board of a public company is supposed to represent the shareholders, and keep the managers of the company honest. Critics like Roger Lowenstein in the Harvard Business Review argue that Dimon should give up the Chairmanship for this very reason:
“The board chairman is about watching the watchers. If Dimon’s bank were owned by a single family, supervision would be no problem. But in a public company ownership is spread among millions of disparate shareholders. Day-in, day-out, the senior managers have far more power than the people they work for . . . The best solution is a vigorous and independent board, whose job is to represent the public owners. And when Dimon reports to that board, his role should be similar to that of a diligent store manager, or of any hired hand, reporting to his owner on how the business has been going. Dimon shouldn’t run the board, because the board is the agent for Dimon’s boss, and its first responsibility is to monitor Dimon.”
Theoretically, this approach to corporate governance makes sense. The board should represent shareholders by keeping tabs on the managers of the company. Everybody should have to answer to somebody. But of course, this raises the question of “Whom does the board answer to?” The reason why effective corporate governance is so hard to achieve is because its difficult to find people who can consistently act in the interest of a group of other people. And whether the Chairman and CEO are the same person or two different people, this so-called “agency problem” doesn’t go away.
A 2011 study by the Conference Board highlights this fact. It reviewed the literature studying the effectiveness of split and joint Chairman/CEO roles and found “that board effectiveness is affected by the chairman’s industry knowledge, leadership skills, and influence on board process rather than by the particular leadership structure chosen.” In other words, a good chairman is a good chairman, regardless of whether he happens to be a CEO or not.
The creation of corporate forms of ownership is one of the landmark achievements of capitalism. A limited liability corporation allows for ownership, and most importantly risk, to be spread across a large number of people. Amazing projects can be launched when the risk of failure is spread among many people. But when risk is diffused, so is responsibility. And when no one person is responsible for the success of a venture, corruption and incompetence can ensue.
So in the end, whether or not Dimon keeps his joint role, the fact that shareholders are paying closer attention to this issue is probably the best thing that can happen for the governance of JPMorgan in the long run. If more shareholders spend time thoroughly evaluating Dimon (and other corporate leaders), the performance of executives and board members should improve.