The on-going JP Morgan Chase, London Whale drama about
striping Jamie Dimon of his joint CEO-Board Chairman title, along with the
replacement of some directors, raises interesting governance lessons. These lessons
are not just limited to JP, Dimon and banking. They apply to most major
decisions, good and bad, including M&A.
Dimon is a strong willed, successful, confident leader, some
would say over confidant, AKA a great man. He runs a large complex organization
operating in a challenging industry undergoing rapid change. As the Whale
incident demonstrates, he operates with limited board oversight. JP’s board is
large, has a long tenure, and was handpicked by Dimon, who controls the
selection and nominating process. The
board has limited industry technical experience in key areas like risk
management. Hence, it is deferential to the CEO/Chairman’s wishes and
decisions. This is reinforced by his relatively successful navigation of his
bank thru the financial crisis.
As Douglas Hubband notes, never attribute to malice or
stupidity that which can be explained by moderately rational individuals
following incentives in a complex system of interactions. The purpose of board
governance is to protect the institution from being driven by the narrow
interest of an individual, the great man. Absent this governance check, Warren
Buffett’s Institutional Imperative takes hold.
Institutional Imperative involves (1) resisting change, (2)
staff support of leadership desires and actions regardless of merit using all
means available including complex financial models and detailed strategic plans
prepared by expensive and high profile advisors and (3) slavishly following
peer behavior. It is very difficult to challenge great men decisions and desires.
This is probably best summed up by former MGM head Louis B. Mayer’s comment
that “….he admired men who were unafraid to speak their mind even if it cost
them their jobs.”
Some possible control mechanisms include:
1)
Spliting the CEO and Board Chairman roles
2)
Obtaining a strong lead director capable of
challenging the great man
3)
Smaller boards
4)
Independent experienced directors - no more
museum directors on the bank board!
5)
Proper incentives for both management and the
board
Perhaps most importantly, a culture which encourages
professional challenge of senior management decisions is needed. JP’s
management discussion in their 2012 annual report in which they discuss the
London Whale problem provides some interesting points - albeit learned the hard
way after a $6B loss. Some of the more
important points are as follows:
1)
Fight complacency: do not assume tomorrow will
look like today. Question others and let others question you-especially after a
long period of when thing have gone well.
2)
Overcome conflict avoidance: ask hard questions.
3)
Controls must match the activity being
conducted. This means for big ‘bet your company type’, major acquisitions use a
rigorous independent review process.
4)
Trust but verify: the board should not micro
manage executives. Neither, should it blindly assume they are correct. Make
them verify their plans.
5)
Do not shoot the messenger: encourage everyone
to quickly surface problems so they can be fixed before they become fatal.
Even great men have bad days and make bad decisions. Good
governance can help minimize the damages of those bad decisions on their
organizations.
J
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