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JPMorgan Shareholders Chose Wrong Side of History

by Michael W. Stocker and Christine S. Azar
American Banker |
Baron de Montesquieu, explaining how best to avoid abuses by leaders, put it simply: "power must check power."

Baron de Montesquieu, explaining how best to avoid abuses by leaders, put it simply: "power must check power." Although the principles of checks and balances have fostered stable governments for more than three hundred years, Enlightenment philosophy has yet to make much headway on Wall Street, and investors are paying the price.

The last few weeks have seen a heated and very public battle over a startling question: whether Jamie Dimon, tarred with his role in one of the greatest debacles in the history of investment banking, should be permitted to report to nobody but himself.

As chairman of the JPMorgan Chase board, Dimon is charged with supervising the senior management of the venerable investment bank: reining in excessive risk-taking by executives, determining whether compensation is fair and aligned with corporate needs, and looking out for the interests of the company's thousands of shareholders.

Anyone at the helm of JPM's board in the last year would certainly be taking the company's senior management to the woodshed. The investment bank's CEO has admitted to being gravely wrong in his dismissal of concerns over trading practices that have led to billions of dollars in losses, conduct that has led to a lacerating series of public hearings and widespread denunciations in the press. The problem, of course, is that the CEO is also Jamie Dimon.

The conflict of interest inherent in having one person serve as both the chief executive of a company and as chairman of the board has been on the radar of institutional investors and shareholder advocates for quite some time. Critics of the dual role point to studies demonstrating that, over the long term, companies with independent chairmen have better performance and greater transparency.

These critics have some powerful allies. The Council of Institutional Investors, a nonprofit association representing institutional investors with more than $3 trillion in aggregate assets, takes the position that a board should be chaired by an independent director and that the CEO and chair roles should only be combined in very limited circumstances.

That view has clearly had an impact. The trend is decidedly away from shared roles and to a separation of the board from management. In 2007, only 35% of the Fortune 500 had split roles; in 2012, that number was 43%. According to Proxy Monitor, in 2013, the second most common shareholder proposal was a call for an independent chairman.

In Dimon's case, after a herculean public relations job, shareholders rejected a non-binding proposal for the roles to be split, and he will get to keep both of his titles. While preserving Dimon's autocracy will do little to repair the company's battered brand, it is almost certainly on the wrong side of history.