We learned earlier this week that James Dimon, chairman, president, and CEO of JP Morgan Chase, will retain all of his job titles, at least for the foreseeable future. Why is this big news? What does it mean for the principal constituents of a large banking corporation? And, by the way, who is the main constituent of any large bank today? (This week's blog is a followup to last week's, "Why Lenders Should Care About Corporate Governance.")
Constituencies to consider
There are a variety of possible answers to that last question and they probably are all more or less correct or at least plausible.
I have stopped being surprised at how many bankers today consider that the shareholders of the bank are the ultimate constituency of the enterprise. It's as if customers, depositors, the general public, the community, employees and creditors are all of an inferior status to the owners. Somehow, this notion just doesn't sit well. It simply downgrades by inference the function and utility of all the other players.
FDIC is looking out for the Deposit Insurance Fund and that ultimately means the good of the general public. That's probably as reasonable and comprehensive an answer as we'll get. But a listing of the constituents of a large bank today is quite lengthy and probably pretty similar to one of any other sort of business enterprise.
There are many companies today that openly concede that employees are number one. Without employees, there is no business and this is nowhere more accurate than in a service business.
Others stress the customers' position as number one, as without the customers there isn't much of a business to conduct or own.
Importance of governance and oversight
What I'd like to consider is what role a board of directors should play in balancing the various interests, rights, and duties of all the constituents in a bank today. What sort of overarching view should we have about proper governance and oversight of the enterprise?
Dimon by all accounts and by personal reputation is one of the leading bankers of our day. He came up the hard way, by dint of hard work. He has a track record of success by virtually any principal metric. His record has earned him a front row seat in any assembly of modern day banking practitioners.
Yet his high-profile campaign over the last year to hold onto both the chairman and CEO titles has been controversial. Why?
Since Enron and some of the other high-profile examples of corporate misfeasance and malfeasance of the last dozen years, a body of opinion has developed that the two senior roles of most any corporate structure should be exercised independently.
This is to help prevent or at least minimize any governance conflicts between the board and the CEO. Proponents of splitting the functions at JP Morgan cite as justification the large trading loss discovered a year ago. They held that it was evidence of perceived weaknesses in risk management. They point to considerable executive turnover at the bank's managing committee level. And they jeer over the recent embarrassing downgrade as reported in the press (and accidentally disclosed as part of a congressional hearing) of its management rating, one of the key components of its composite CAMELS rating.
Such matters are not normally viewed by the public. It's impossible from outside the firm to effectively assess the impact of any or all of these. My only point is that such disclosures are usually rare and may not be particularly reflective of the state of affairs. They are also convenient but unfortunate examples of reputation risk as well as representing possible financial exposures to the firm.
Not a governance case study
The issue of segregating the roles of CEO and chairman are probably not well served by citing the record of JP Morgan or its principal managers. With rare exceptions, overall performance by most conventional metrics has been stellar. Students of governance must look more broadly than at this institution.
The history of centralizing power in one individual has not always had happy outcomes. There are many examples in the last few years of CEOs who have misused their power in large and small ways.
Some of the actions have been downright silly but they indicate the likelihood of a board not exercising sufficient restraint on personal behaviors of senior employees.
Sarbanes-Oxley has its rules and regulations dealing with many management practices. Any of us who have worked around or directly for vain and ego-centrist top executives have probably wondered why none of these persons were not called to account for the displays of arrogance and excess. Here are a few examples that come quickly to mind:
- Failure to pick successor. Many well-entrenched CEOs have been reluctant to identify a clear successor, or they've actively thwarted an orderly succession plan. This is not good governance and all the stakeholders are at risk of bad outcomes.
- "Captain coming aboard!" One CEO of a Park Avenue-based Fortune 500 company was a navy veteran. He insisted that whenever he was in the corporate headquarters building, the company flag should be flown on its own flag pole in front of the building. Whenever he left the building, the flag was to be taken down.
- Trappings of the King. One famous Fortune 500 CEO had each company aircraft (there were several) fitted out with china bearing his personal coat of arms.
- Semper Financial? One famous mega-bank CEO, now retired, used to hand out crystal paperweights fashioned in the shape of hand grenades. These were used to reward his principal subordinates for their personal performance that emulated his "Marine-like" personal deportment and famed combativeness.
Behaviors like these draw smiles and a level of incredulity by many not within the direct influence of such persons. And, with the exception of failing to take care of succession, they are not "fatal flaws."
What they tell me is that boards of directors should be alert to other less-benign indications of egocentric behavior. Chief items on such a list of concerns would include a tendency to bully subordinates and peers and to use his or her influence to stifle a collegial examination of risk that might flow from these behaviors.
Remember the mission
Running a large corporate enterprise is hard work today. It's also the work of persons with healthy but not outsized opinions of their individual worth and value.
By all accounts, Jamie Dimon is the first-class executive that he seems to be. What you see is what you get.
But let's not forget that there is a long-term corporate governance tendency to separate the functions of board chairman and CEO. At its heart it's a risk control measure and until risk has been substantially eliminated from our business models, the subject will be a persistent discussion topic.