Question

Chapter Review 10-7d Mini-Case The Imperial CEO, JPMorgan Chase’s Jamie Dimon Jamie Dimon, CEO of JPMorgan Chase & Co., is one of the very few top executives at large banks or major financial services firms who was unscathed by the substantial economic recession which began in 2008—a recession largely caused by those firms taking inappropriate risks. He is described as charismatic and an excellent leader. Yet, in 2012, JPMorgan Chase experienced its own scandal caused by exceptional risk taking. Traders in its London operations were allowed to build a huge exposure in credit derivatives that breached the acceptable risk limits of most analytical models. As a result, the bank suffered losses of more than $6 billion. It is referred to as the London Whale trading debacle. In 2013 and 2014, there were large regulatory and legal settlements. Most significant was a $13 billion settlement with regulators over mortgage bond sales in 2013. In addition, to this record settlement, “the bank paid $2.6 billion to resolve allegations that it didn’t stop Bernie Madoff’s Ponzi scheme and two fines of about $1 billion each stemming from currency rate manipulation and the London Whale trading loss.” It may need an additional $20 billion in additional capital to satisfy regulatory bank safety rules. One Democratic Senator from Delaware, Ted Kaufman, noted: “I think Jamie Dimon is Teflon-coated.” Because of the huge loss and concerns about the lack of oversight that led to these fines and settlement, there was a move by shareholder activists to separate the CEO and chair of the board positions, requiring Dimon to hold only the CEO title. Playing key roles were the American Federation of State, County and Municipal Employees (AFSCME) and the Institutional Shareholder Services (ISS). The AFSCME was pushing to separate the holders of the CEO and chair positions at JPMorgan Chase. The ISS was pushing for shareholders to withhold the votes for three directors currently on the Morgan’s board policy committee. Dimon described the London Whale debacle as an anomaly caused by the inappropriate behavior of a few bad employees. However, this debacle plus the huge fines and settlements seems to suggest serious weaknesses in the bank’s oversight of activities involving significant risk and compliance with regulatory rules. Executives and board members of JPMorgan Chase worked hard to thwart these efforts. Lee Raymond, the former CEO of ExxonMobil who has been on the JPMorgan board for 28 years, played a key role in these efforts to support Dimon and avoid a negative vote. This group lobbied major institutional shareholders and even asked (though he declined) former U.S. President Bill Clinton to help work out a compromise with the AFSCME. They even suggested that Dimon would quit if he had to give up one of the roles and it would harm the stock price. In the end, Dimon and the bank won the vote with a two-thirds majority for Dimon to retain both positions. Several analysts decried the vote and suggested that having a third of the shareholders vote against Dimon is not a major vote of confidence. One even suggested that the vote is not surprising because of the 10 largest institutional owners of the bank’s stock, seven have CEOs who also hold the chair position. So, how could they openly argue that this is bad for JPMorgan when they do it in their organizations? Furthermore, these major institutional investors want the banks to engage in high-risk activities with the potential to produce high returns. This is especially true because the downside risk of losses is low as the government cannot afford to allow the big banks to fail. One analyst suggested that the shareholders voted out of fear (potential loss of Dimon) and for personality instead of good corporate governance. Analysts for the Financial Times argued that the outcome of this vote demonstrates how weak shareholder rights are in the United States. Finally, another analyst noted that while splitting the CEO and chair positions does not guarantee good governance, it is a prerequisite for it. Lee Raymond suggested that the board would take action. Several speculate that such actions will not relate to Dimon duel positions, but rather to a reconfiguration of the board members on the risk and audit committees. Some have argued that certain members of these committees have little knowledge of their function and/or have financial ties to the bank, thereby creating a potential conflict of interest. One protection for Dimon is that the JPMorgan Chase continues to perform well, even with poor ratings from governance evaluators. Case Discussion Questions 1. How well do you think the governance system of JPMorgan Chase is working in protecting shareholder interests? 2. What particular governance devices are helping or hindering good governance in the JPMorgan Chase situation? 3. What do you recommend toimprove the governance system specifically for JPMorgan Chase but also overall relative to the system of governance devices described in Chapter 10? Your response to each of the three questions above should be between 150-to-200-words. The content taken from textbook or any other source should be paraphrased (written in own words). Each response should be written in complete sentences with attention paid to good grammar and spelling.

Answer 1

1.   it appears that the administration arrangement of JPMorgan Chase isn't working very well in ensuring investor premiums. While a vote had been called for to isolate the CEO and chair of the board positions, it didn't hold. A few investigators proposed this was because of the dread of Dimon leaving from the investors, which would contrarily effect stock cost. Notwithstanding the position of experts, or the manner in which the vote turned out, JPMorgan Chase is proceeding to perform well regardless of the allegations against the administration framework, and toward the day's end, the activity of an open company is to include an incentive for the investors. Also, there is the issue of the over the top hazard taking. While it is important to go for broke so as to acknowledge significant yields, unreasonable hazard taking can be viewed as entirely flippant with regards to the privileges of the investors.

2.   JP Morgan Chase is utilizing the market for corporate control, which is an external administration system that winds up dynamic when an association's internal controls fall flat. Numerous investigator contended that investors would cast a ballot out of dread, if the CEO would be supplanted and the stock would go down in worth making the most of the vote for character rather than great corporate administration. They choose to keep Jamie Dimonas both CEO and seat of the board chiefs with the goal that they can some way or another keep a solid and bring together picture to general society. Despite the fact that, this specific instrument is certainly not a solid match for the investor and their rating from administration evaluates is poor, JP Morgan is doing admirably all in all industry.The organization keep on indicating improvement and performing at an extraordinary level.

3.   Some proposals that will improve the administration framework specifically for JP Morgan Chase is to actualize administration systems on ownership concentration and official pay. By having a more concentrated ownership it will deliver increasingly dynamic and compelling observing and this will force supervisors and top managerial staff to settle on choices that best serve shareholders' advantage.

All together for JP Morgan to refocus with their investor advantages and not lose them, JP Morgan should concentrate more on the inside corporate administration system. JP Morgan should attempt to fulfill the investor premiums. The top managerial staff should almost certainly define limits for the establishment morals and qualities. A code of ethic must be convey to the top-level supervisor and other partner with the goal that they realize what is normal from them . JP Morgan can likewise differentiate the foundation of the board individuals with the goal that the votes are not constantly one-sided. In JP Morgan case, the greater part of the board individuals were holding two titles and they were not going to remove one title from Jamie Dimon.In request to have great corporate administration, expansion measure can be taken:

Adjust remuneration of board chiefs by diminishing investment opportunities

•Create lead executive job

•Executive remuneration that adjusts the interests of chief and proprietors

•Create increasingly money related establishments that control enormous square investors known as institutional proprietors.