Thursday, May 16, 2013

Jamie Dimon and JP Morgan, continued: CEO and Chairman of the Board; One Job or Two?

Joe's post on Monday (Great Men + Weak Governance = Bad Decisions)
did an excellent job of discussing the CEO/Chairman controversy at JP Morgan.  The issue is certain to get additional press as shareholders vote on the split.  Joe and I don't always  agree on particular issues, but in this case we are fairly well aligned.  There are just a few things I'd like to emphasize about the situation and the vote.

First, the empirical evidence on splitting the two roles is mixed.  There is not clear evidence that it matters either way.  The theory, however, is more one sided.  The board's most important job is to hire (and know when to fire) the CEO.  It is tougher to do this unless the two jobs are split.  

My personal view is that the empirical evidence is split simply because both models have some merit and some personalities work better under one structure than the other.  When things go wrong, however, one looks for reasons and companies not splitting the roles face tough questions. 

There is a popular insurance ad being used today that depicts a crocodile creeping up on an unsuspecting golfer.  The ad reads, 'who you insure with doesn't matter - until it does'.  The same is true of some governance structures.  They may not appear to matter - until some catastrophic event occurs.

This is certainly what happened with the 'London Whale' situation.  This is not to say that would have been prevented by splitting the roles.  We don't know.  But as Joe points out, Great Men + Weak Governance = Bad Decisions.  Certainly, Catastrophic Errors = The Need to reexamine potential causes and combining the two roles was certain to be questioned.

It is interesting to note that in the UK about 95% of the largest companies split the roles. But again, this doesn't mean it is the right thing for a particular company.  One doesn't necessarily think of UK firms as being better governed or having dramatically better performance than their US counterparts.  

Which brings us to the upcoming vote.  Remember that, like Say on Pay, the vote to split the two roles is only advisory to the board.  Boards need not follow the recommendation suggested by the vote. But like the evidence on Say on Pay, many boards do make changes in the face of shareholder pressure.  For JP Morgan, this would be a difficult decision in face of Dimon's generally outstanding performance.  Dimon has threatened to quit if the roles are split.

Moreover, in this election, the board itself is facing challenges.  Our evidence shows that a negative recommendation by ISS is the single most powerful determinant of votes in shareholder elections, swinging votes by an average exceeding 18%.   While this level of vote reduction might not cause a director to resign or be forced to resign, our evidence on director votes (discussed in a subsequent post) also suggests that even a very small reduction in votes leads boards to make changes to CEO compensation or corporate governance mechanisms.  Nevertheless, when particular directors receive less than 50% of the vote, boards have historically found excuses to retain the directors.   So changes are made, but turnover is generally not one of them.

Time for a prediction: the vote goes against retaining the two roles or is just narrowly defeated, but Dimon stays as the boards make other changes that they hope will placate shareholders.  In addition, several directors earn substantially lower support (75% or less).  At the end of the day, however, shareholders will recognize Dimon's overall performance.  

All the best,



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