There’s a surprising degree of blogosphere acceptance of JP Morgan’s messaging on the shareholder vote today regarding whether to split the CEO and Chairman roles, that this result was a vote of confidence in his prowess as CEO.
Yet New York Magazine described the extent to which Dimon had to call in the big guns like Warren Buffett, Hank Paulson, and Michael Bloomberg to press his cause, and added:
“It was very much an effort across the bank,” one person familiar with JPMorgan Chase’s lobbying efforts told Daily Intelligencer, adding that “Jamie was not the one making calls on this.”
So with that as background, still getting a 32% vote for splitting the chairman and CEO vote, while a noteworthy improvement over the 40% vote last year, isn’t resounding, particularly when you remember the following: Dimon had threatened to quit if he was subjected to some badly needed adult supervision had his span of responsibilities reduced by losing the Chairman role.
That threat to quit is critical to reading the vote. While Dimon stalwarts will claim it’s because Dimon is indispensable, the fact that there is no one even remotely plausible in the van as successor means Dimon has made himself indispensable (well, until you remember the Clemenceau saying, “The graveyards are full of indispensable men.”). In fact, one corporate governance expert wrote me to note that unplanned, and worse, contested successions are big negatives for stock prices. As a result, he doubted any fiduciary could vote in favor of the split, no matter how much the managers involved felt better governance was needed.
The poster child for an unplanned succession of a large, risk-seeking, international financial firm is AIG, when Eliot Spitzer used the threat of prosecution to force Hank Greenberg to resign. AIG had been run like a French court, with a remarkably large number of decisions being funneled to Greenberg personally. A long-standing colleague joined AIG in a senior level, ultimately responsible for a $100 billion portfolio, a few months before the Greenberg ouster. He was looking for a job as soon as Greenberg departed, not because he was at risk, but because he could see how the company started coming apart. As he put it: “It’s like being in a moving car when the axels have been pulled out. You are waiting for the wheels to fall off.”
And as we’ve stressed, press and Senate examination of the London Whale trade and Josh Rosner’s detailed analysis of JP Morgan’s institution-spanning regulatory violations reveal a rogue institution that has, through being too hard to disarm as one of the two big clearers of tri-party repo plus spending tons of money on lobbying and PR, has managed to create an image of being well-managed that is wildly at odds with the facts. JP Morgan was compelled to disclose a material weakness in internal controls. That’s the worst level of internal control failure a going conern can report. Sarbenes Oxley expert Michael Crimmins had pointed out that that sort of failure is structural, casting doubts about prior year financials and requiring the problem to be fixed before it is even possible to prepare audited financial.
But s Francine McKenna pointed out by e-mail, JP Morgan’s auditor, PriceWaterhouse Coopers has been protecting the bank, not just on this front but also working hard to downplay any dirty laundry including repurchase liabilities, loan loss reserves, and legal contingency reporting, particularly regarding mortgage-related litigation. Media reports, in describing the London Whale debacle, described actions and reporting relationships that revealed, the supposedly well-mananged bank had multiple, abject risk control failures, including having risk management functions for the Chief Investment Office reporting to Ina Drew, the head of the CIO, rather than the corporate risk management function. As for the extensive regulatory violation, Dave Dayen, in his summary of the Rosner report, called JP Morgan “mostly a criminal enterprise” and added:
The best way to describe the report, “JPM – Out of Control,” is that it reads like a rap sheet. Notably, Rosner takes mortgage abuses almost entirely out of the equation, and yet still manages to fill a 45-page report with documented case after documented case of serious fraud and abuse, most of which JPM has already admitted to (at least in the sense of reaching a settlement; given out captured regulatory structure the end result is invariably a settlement with the “neither admit nor deny wrongdoing” boilerplate appended). Rosner writes, “we could not find another ‘systemically important’ domestic bank that has recently been subject to as many public, non-mortgage related, regulatory actions or consent orders.”
Obviously this contrasts with Jamie Dimon’s spotless reputation (at least in Washington) and his bold talk of a “fortress balance sheet.” Yet as you read the report, it’s hard to see the bank as anything but a criminal racket just days away from imploding, were it not propped up by implicit bailout guarantees and light-touch regulators. Rosner paints a picture of a corporation saddled with pervasive internal control problems, which end up costing shareholders, and which “could materially impact profitability in the future.”
With this as background, there are two ways to read the vote. One is that institutional investors, having gone through the motions of doing their job by providing nay votes last year, are ultimately part of the same racket and aren’t willing to test Dimon on whether he blinks or not. The other is that we are only seeing the public face of an ongoing power struggle that is not as done as the JP Morgan apparatus would have you believe.
Supporting the latter reading the Financial Times reports, with unusually open skepticism, that the JPM meeting was “well choreographed” and that shareholders took more out of director hides than out of Dimon:
But as Dimon left JPMorgan’s Florida campus for the nearby private airport, his board is still under scrutiny and questions remain over his successor.
Ellen Futter, a museum president, James Crown, who runs a Chicago-based investment firm, and David Cote, head of manufacturing giant Honeywell, bore the brunt of investor dissatisfaction with the “London whale” affair.
In a country where rubber-stamping exercises are commonplace, none of the three directors – all members of the risk policy committee – could attract more than 60 per cent of the vote for their re-election.
According to ISS, a shareholder advisory service, the average support for board nominees at S&P 500 companies this year is 96.9 per cent. Before Tuesday’s vote, just six nominees out of the 2,127 people elected to 237 boards this year had failed to receive support in excess of 60 per cent of votes cast.
Given a choice between sending a message to the board and rebuking their still-popular chief executive, investors chose to slap the directors, raising the question of whether the issue of oversight of Mr Dimon has been put to rest.
The bank’s lead director, Lee Raymond, 74, former head of ExxonMobil, took a more active role at this meeting compared with last year, answering shareholder questions, sometimes deftly.
But some investors were annoyed that questions addressed to other directors were answered by either Mr Raymond or Mr Dimon. Others expressed displeasure that most of the board sat with their backs to the room.
While Mr Raymond stressed that he took “concerns, suggestions and feedback very seriously” he gave no ground on the dual role and promised an unspecified “tempered” response to the votes against directors.
People familiar with the situation said one probable response would be recruiting one or two new members to the risk policy committee. The board hired Tim Flynn, a former KPMG executive, to the committee last year and his expertise in risk and the fact that he arrived after past lapses helped him through Tuesday’s vote unscathed.
Bloomberg confirmed the FT reading that the risk management committee was likely to see a shakeup.
Even though Dimon and his allies won this round, they did not score a decisive victory. They simply bought Dimon some more time. Having weak parts of the JPM operation subject to tougher board oversight is a far cry from having an independent chairman but is still a clipping of Dimon’s wings. Moreover, one expert suggested that the 33% vote might well be the result of some of the institutions that voted against Dimon last year extracting some significant concessions.
The key indicator is whether the board demands a succession plan. If they make that a priority, they will be moving deliberately in a campaign to reassert their authority over the bank. But absent this sort of push, Dimon wins.
So we’ll see in the coming months whether Dimon’s hubris will bring him to the end he deserves or not. Stay tuned.