JPMorgan Chase & Co. (NYSE:JPM), once considered the safest bank in the nation, is becoming famous for bad deeds. First the loopholes in its internal controls exposed by the London Whale incident, and now corporate governance issues. While the anticipated split in the roles of the CEO and the chairman would be beneficial, analysts believe the bank’s stock could fall by almost 10% if the roles are split and Jamie Dimon decides to exit.
Shareholders are the owners of a company. However, they don’t get to make the decisions related to the daily operations of the company. They appoint directors who act to safeguard their interests. The directors then elect a chairman of the board who is supposed to keep watch over the CEO. Now, I believe you are in for some trouble if the CEO and the chairman of the board are the same person. Separating the two titles would result in reduced agency costs and improved performance.
Does the split actually help?
It is widely understood that the roles of CEO and chairman of the board must be split for the normal operations of an organization. Such is the case at Citigroup Inc (NYSE:C), where the roles are split between Michael Corbat (CEO) and William O’Neil (chairman). The split in the roles has been immensely beneficial for Citigroup Inc (NYSE:C). It was the split in the roles coupled with shareholder activism at Citigroup that led to the exit of the bank’s former CEO after he was made accountable for the bank’s failure to pass the stress test in 2012.
As a result of better corporate governance practices, Citigroup emerged as one of the safest banks after the results of the latest stress tests were made public. The results demonstrated that Citigroup has the highest ability to withstand another severe financial crisis. Besides, Citigroup was able to post a revenue beat during the prevailing revenue-challenged environment.
The bank has run down most of its legacy problems assets, while at the same time it has moved toward a more customer-driven model. Going forward, the bank is expected to reduce its risk and free up capital. Besides, the bank’s global footprint, particularly in the emerging markets, should help mitigate the impact of sluggish US loan growth. So, the benefits of the split in the roles of the CEO and chairman are obvious.
Poor corporate governance at US banks
It is widely believed that the corporate governance practices at most U.S. money- center banks are not very encouraging. Only Bank of America Corp (NYSE:BAC)’s Brian Moynihan and Citigroup’s Michael Corbat have to be accountable to the chairman of their respective boards. The two roles at Bank of America Corp (NYSE:BAC) were split after the management’s poor handling of the Merrill Lynch takeover. The vote was termed as “an unprecedented victory for shareholders and shows the value of corporate government activism,” by the director of corporate governance and pension investment at the American Federation of State, County and Municipal Employees.
Bank of America is currently faced with great headwinds. However, you can expect better results if the bank is able to implement a faster-than-expected winding-down of its run-off portfolio. The bank’s future is also linked to the pace of recovery in the US housing markets.
The CEO’s at most of the other US money-center banks are considered to have dual roles. The case is not very different at the nation’s largest bank. For a very long time now, Jamie Dimon has been holding the dual roles of the CEO and the chairman of the board, resulting in an intensified debate on the subject.
The Wall Street Journal reported that JPMorgan’s CEO is resisting all demands to split the two roles and has also threatened to exit the bank if the shareholders approve the split on May 21. While the upcoming vote will be non-binding, the bank’s directors would face tremendous pressure if more than half of the shareholders vote in favor of the anticipated split.
We must not forget that last year, a similar proposal was welcomed by more than 40% of the bank’s shareholders. Therefore, I believe there is a good chance that the percentage will be higher this time around.
Two of the major shareholder-advisory firms (Glass Lewis and ISS) have already positioned themselves against the current management structure, saying it does not safeguard shareholders’ interests. They argue that the multi-billion dollar trading loss (the London whale) was a result of the risk-management breakdowns due to poor management oversight.
Rational behind the 10% anticipated decline in JPMorgan
However, some analysts and JPMorgan Chase & Co. (NYSE:JPM)’s directors are of the view that the current management structure is in the best interest of the bank’s shareholders. They believe that if Dimon is stripped off the chairman’s role, he would leave the bank altogether.
One analyst has predicted that the bank might lose up to $20 billion in value if its current CEO decides to exit. He cites the following three reasons for such a potential decline in value: Dimon has been able to deliver top stock-price returns under his leadership; a change in the top management would bring about operational changes reflecting added management tail risk in the presence of the prevailing regulatory tail risk; and there is no obvious successor to the current CEO.
Conclusion
I believe Dimon’s exit would hurt the bank, but only in the short term. I further believe that the anticipated split in the roles would be better for the bank to build a management structure where the CEO and top management are made accountable to the board of directors, who are considered representatives of shareholders. Therefore, I believe its about time that shareholders take the a bitter pill and vote against the dual-role structure and for the best interest of the shareholders and the financial system in general.
The article This Bitter Pill Will Create Long-Term Value for JPMorgan Chase & Co. (NYSE:JPM) Shareholders originally appeared on Fool.com.
Adnan Khan has no position in any stocks mentioned. The Motley Fool owns shares of Bank of America, Citigroup Inc , and JPMorgan Chase & Co.
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