BUSINESS MAY 22, 2013
Last year, an unheralded shareholder proposal to split the chairman and CEO positions at JPMorgan Chase—both currently held by Jamie Dimon—captured 40 percent of the vote. This year, the proposal had much more fanfare, riding a wave of shareholder activism that has been largely successful in forcing changes in corporate governance at the country’s largest publicly traded companies. Moreover, JPMorgan Chase has been mired in management chaos, stemming from the failed “London Whale” trades that cost the company more than $6 billion, as well as a mile-long rap sheet of lawsuits and regulatory enforcement. Activists even secured the support of the two major shareholder advisory firms.
But when the votes were tallied on Wednesday morning, the measure fared even worse than last year, with Dimon preserving his status as chairman and CEO by a 68-32 vote. How did JPMorgan improve their standing with shareholders after such a notorious year?
Management would chalk it up to the company’s record profits and favorable stock price, signaling no need to rock the boat and dismantle a successful corporate team. In reality, not only did the bank stymie activist shareholders by withholding critical information from them, but Dimon secured his position by threatening to detonate the company’s stock price—showing an irresponsibility that is precisely what you don’t want in a chairman of the board.
Imagine an election where one campaign has perfect information about the universe of voters—who has cast a ballot, who hasn’t, and who needs to be persuaded—and it deliberately withholds that information from its opponent. That’s what happened here. In the week leading up to the vote, Broadridge Financial Solutions, the firm that tallies ballots for JPMorgan Chase on proposals like this, stopped providing any information to shareholders about how many votes had been cast and who had voted. After a query from New York Attorney General Eric Schneiderman, Broadridge relented and delivered the information. But the damage was done; JPMorgan Chase had targeted its message to remaining voters while the activists were totally in the dark.
But much worse than this was Dimon’s very public threat to step down as CEO if he was stripped of his chairman position. The hints to investors, never meant to be all that secret, spread quickly through the industry. Analyst Mike Mayo predicted that the bank’s stock would drop by 10 percent if Dimon left. Needless to say, shareholders would rather not see the stock they hold tank from a scenario they can control.
Without this threat, sponsors say, investors may have been more comfortable to install an independent board chairman that could oversee the operations of management. “People were worried Dimon was going to walk,” according to one sponsor.
The reason that Dimon is seen as so indispensable is that the board, which Dimon also currently runs, has not made preparations for a successor, which is supposed to be a core responsibility of the chairman of the board. It’s his or her job to prepare for even unlikely management shakeups, and put in place contingencies to keep the firm successful and profitable. So Dimon kept his chairman job by making sure everyone knew he was performing so badly at it that stockholders would lose money if they replaced him. The scene from "Blazing Saddles" with Sheriff Bart pointing the gun at his own head and threatening to shoot comes to mind: Nobody move or the stock price gets it.
JPMorgan’s legal woes, meanwhile, continue. Just a couple weeks ago, California Attorney General Kamala Harris sued the firm over a variety of fraudulent practices in collecting credit card debts, including many of the same abuses—robo-signing of court documents, lying about credit card balances—that brought the mortgage industry to its knees. The company has paid out $16 billion in fines, settlements and litigation expenses over the past four years, and it hasn’t come close to the end of that line. Activists will surely return to the need for oversight of an out-of-control firm in future years if the enforcement actions mount.
The means by which JPMorgan shareholders kept Jamie Dimon in charge reveal real weaknesses at the bank, with no fallback plan should Dimon ever leave. That doesn’t represent the stability of its corporate governance; it represents a crisis.
David Dayen is a writer living in Los Angeles.