Reference no: EM133315290

MINI CASE STUDY

Jamie Dimon, CEO of JPMorgan Chase & Co., is one of the very few top executives at large banks or major financial services firms who was unscathed by the sub- stantial economic recession which began in 2008-a recession largely caused by those firms taking inap- propriate risks. He is described as charismatic and an excellent leader. Yet, in 2012, JPMorgan Chase experi- enced its own scandal caused by exceptional risk taking. Traders in its London operations were allowed to build a huge exposure in credit derivatives that breached the acceptable risk limits of most analytical models. As a result, the bank suffered losses of more than $6 billion. It is referred to as the London Whale trading debacle. In 2013 and 2014, there were large regulatory and legal settlements. Most significant was a $13 billion settle- ment with regulators over mortgage bond sales in 2013. In addition, to this record settlement, "the bank paid $2.6 billion to resolve allegations that it didn't stop Bernie Madoff's Ponzi scheme and two fines of about $1 billion each stemming from currency rate manipula- tion and the London Whale trading loss." It may need an additional $20 billion in additional capital to satisfy reg- ulatory bank safety rules. One Democratic Senator from Delaware, Ted Kaufman, noted: "I think Jamie Dimon is Teflon-coated."

Because of the huge loss and concerns about the lack of oversight that led to these fines and settlement, there was a move by shareholder activists to separate the CEO and chair of the board positions, requiring Dimon to hold only the CEO title. Playing key roles were the American Federation of State, County and Municipal Employees (AFSCME) and the Institutional Shareholder Services (ISS). The AFSCME was pushing to separate the holders of the CEO and chair positions at JPMorgan Chase. The ISS was pushing for shareholders to withhold the votes for three directors currently on the Morgan's board policy committee.

Dimon described the London Whale debacle as an anomaly caused by the inappropriate behavior of a few bad employees. However, this debacle plus the huge fines and settlements seems to suggest serious weaknesses in the bank's oversight of activities involving significant risk and compliance with regulatory rules.

Executives and board members of JPMorgan Chase worked hard to thwart these efforts. Lee Raymond, the for- mer CEO of ExxonMobil who has been on the JPMorgan board for 28 years, played a key role in these efforts to support Dimon and avoid a negative vote. This group lobbied major institutional shareholders and even asked (though he declined) former U.S. President Bill Clinton to help work out a compromise with the AFSCME. They even suggested that Dimon would quit if he had to give up one of the roles and it would harm the stock price. In the end, Dimon and the bank won the vote with a two- thirds majority for Dimon to retain both positions.

Several analysts decried the vote and suggested that having a third of the shareholders vote against Dimon is not a major vote of confidence. One even suggested that the vote is not surprising because of the 10 largest institu- tional owners of the bank's stock, seven have CEOs who also hold the chair position. So, how could they openly argue that this is bad for JPMorgan when they do it in their organizations? Furthermore, these major institu- tional investors want the banks to engage in high-risk activities with the potential to produce high returns. This is especially true because the downside risk of losses is low as the government cannot afford to allow the big banks to fail.

One analyst suggested that the shareholders voted out of fear (potential loss of Dimon) and for personal- ity instead of good corporate governance. Analysts for the Financial Times argued that the outcome of this vote demonstrates how weak shareholder rights are in the United States. Finally, another analyst noted that while splitting the CEO and chair positions does not guarantee good governance, it is a prerequisite for it. Lee Raymond suggested that the board would take action. Several speculate that such actions will not relate to Dimon duel positions, but rather to a reconfiguration of the board members on the risk and audit committees. Some have argued that certain members of these com- mittees have little knowledge of their function and/or have financial ties to the bank, thereby creating a poten- tial conflict of interest. One protection for Dimon is that the JPMorgan Chase continues to perform well, even with poor ratings from governance evaluators.

Question 1. How well do you think the governance system of JPMorgan Chase is working in protecting shareholder interests?

Question 2. What particular governance devices are helping or hindering good governance in the JPMorgan Chase situation?

Question 3. What do you recommend to improve the governance system specifically for JPMorgan Chase but also overall relative to the system of governance devices described in Chapter 10?