An Open Letter to JPMorgan Chase Shareholders

in In the News
February 14th, 2014

From the New York Times
By: Simon Johnson
February 13, 2014

 

Dear Shareholders:

It is a great honor to have been suggested as a potential board member of JPMorgan Chase – by Sheila Bair in an interview in DealBook in The New York Times last week.

Given the daunting problems that continue to face your corporation, I have thought long and hard about whether to allow my nomination to go forward. Upon reflection, I have decided that further change at the top of JPMorgan Chase would be helpful to you, to the financial system and to the broader economy. That is not to say I am seriously proposing myself for the board; rather, I am making serious proposals regarding what the board should do, and I hope powerful shareholders will think harder about whom to support on the board.

Management may not be inclined to include me in its official slate of candidates ahead of the annual meeting of shareholders in May, so I would like to take this opportunity to explain directly to you what would be my top three priorities if elected. (Last year, the company arranged the re-election of all directors and then dropped those who had become controversial; shareholder pressure matters.)

To be clear, my goal throughout would be to increase shareholder value, while also recognizing our responsibility to society – and, through good behavior and a reduced contribution to systemic risk, keeping regulators off our backs. First, we need a more independent board with a greater ability to receive and assess timely information about what is actually happening within the company. (Here is a brief primer by Josh Rosner on some recent issues.)

At a conference attended by institutional investors in September 2013, Laban P. Jackson, a board member for more than 20 years and current chairman of the audit committee, took an apologetic line: “We’ve got these things that we actually are guilty of and we’ve got to fix them.” And he was right that “it’s embarrassing for the board.”

Anne Sheehan, chairwoman of the Council of Institutional Investors, suggested at the event that JPMorgan Chase was not sufficiently open with investors.

Mr. Jackson replied, “That’s got to change, and you guys have to drive it.”

To do this, we should begin by increasing the independence of the audit committee.

The chief compliance officer, the chief risk officer and the chief legal officer (with a particular regard to litigation) should report directly to this committee – as well as to a senior executive who is not responsible for profit and loss. And the audit committee should meet quarterly, without the chief executive.

The goal is not to make operational decisions, but rather to protect and empower crucial gatekeepers who would otherwise become subservient to short-term profit-and-loss considerations. (For more details on what I am recommending, please see the comment letter by Dennis M. Kelleher and Wallace C. Turbeville of Better Markets, a pro-reform group.)

The audit committee is charged under the law with acting in the best interests of the corporation and its shareholders, that is, separate and distinct from the chief executive and other executives. This change in practice, while significant, would be entirely consistent with legal tradition and best governance practice.

Second, we need to change the substance of decision-making at the board level, including how it looks at executive compensation. Despite all the compliance and risk control problems at JPMorgan Chase over the last few years, Mr. Jackson and his colleagues recently awarded Jamie Dimon, the chief executive, a large bonus.

As Prof. Cornelius Hurley of Boston University put it, “This is a thumb in the eye of regulators and a thumb in the eye for the public.”

The $13 billion settlement with the Justice Department last November over JPMorgan’s past mortgage practices has apparently been shrugged off. This is one more reason that the agreement should be subject to greater scrutiny – the subject of a lawsuit initiated by Better Markets this week.

Third, we need to look at breaking up JPMorgan Chase into smaller, more manageable parts.

The available independent analysis indicates that smaller financial institutions currently attract substantially higher valuations (e.g., price relative to tangible book value) than do the megabanks.

My interpretation is that this is largely because the biggest banks are not run in the full interests of shareholders; the operations of these companies are so complex that no one is fully in control.

I would also point out that JPMorgan Chase is operating under an effective size cap; it will not be allowed to grow bigger. And the bank was much better run when it was significantly smaller in the mid- and early 2000s.

And regulators are also not well disposed toward the current structure. Mr. Dimon’s pay raise has only increased pressure from the Senate Banking Committee on regulators, including some at a hearing last week.

Senator Elizabeth Warren, Democrat of Massachusetts, was particularly scathing in her criticism, and she has a strong track record in terms of bringing effective and detailed oversight. Other leading senators are similarly inclined.

Suggestions that there is some sort of “witch hunt” against JPMorgan Chase – for example, for its hiring practices in China – are counterproductive whining. JPMorgan Chase is the largest bank in the world, and it has repeatedly proven to be out of control. Of course the regulators are going to watch us like a hawk, including watching for violations of the Foreign Corrupt Practices Act. And the next time we mess up, the regulators will be held accountable by the Senate (and others). There have been enough warnings.

The details of how to break up JPMorgan Chase remain to be determined – and this would be a crucial task for management, under the direction of the board. But the amount of shareholder value that could be unlocked would be substantial.

The new companies should also become substantially more transparent with regard to the risks they are taking. We need to move away from crude return on equity goals toward a clearer statement of risks.

Investors can then decide for themselves how these much more transparent assets fit within the overall risk profile of their portfolios.

Sincerely,

Simon Johnson

 

Read the letter at: economix.blogs.nytimes.com