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JPMorgan's Imperial Chairman Remains

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Despite serious missteps leading to the London Whale trading scandal, which blew a $6.2 billion hole into JPMorgan Chase's (NYSE: JPM  ) balance sheet and earned the scorn of regulators, CEO and Chairman Jamie Dimon's board has continued to insist that he's doing a great job.

Many investors disagree, and rightly so. However, these dissenters were unable to get majority support for a shareholder proposal pushing the company to take on an independent chair.

According to the preliminary voting results announced on Tuesday, about 32% of shares voted in favor of a shareholder proposal calling for an independent chair at JPMorgan. While 32% is a minority, it is a significant percentage -- especially given the obstacles dissenting investors faced in fighting the board's recommendation.

The value of independent oversight
I believe it is generally a better idea for public companies to employ an independent chair, and the data supports my view. For example, according to a 2012 study conducted by corporate governance expert Nell Minow's organization, companies with a combined CEO and chair offer higher risks and lower long-term returns to shareholders. The study also finds that the costs of paying the combined salaries of a separate CEO and chair tend to be lower than the cost of paying the salary of one person occupying both roles.

Further, I think investors have a particularly strong reason to want an independent chair at JPMorgan, where I believe company leadership has compromised the trust of shareholders and regulators by making inexcusably poor decisions leading to the London Whale scandal. Here are a few highlights:

  • The company obscured risky investments by ignoring risk limit breaches and altering risk models.
  • Even though Dimon allegedly knew about the size and complexity of the London Whale trades and the losses already incurred because of them, he dismissed investor concerns about the trades and called the threat a "tempest in a teapot."
  • Dimon certified a deeply flawed internal controls process.
  • The board exercised such lax oversight over the internal-audit and finance functions, and over Dimon himself, that regulators intervened and required it to submit a plan for enhancing oversight in the future.

Given these missteps, I believe investors were right to call for an independent board chair.

Because of the obstacles Dimon dissenters faced in stripping him of the chairmanship, I find it notable that so many shareholders voted for the proposal calling for an independent chair. 

1. Access to shareholder capital
Like all other public companies, JPMorgan is able to use shareholder capital to lobby for its recommendations and against the recommendations of shareholders. Activist shareholders, on the other hand, have to spend their own money to lobby for their proposals.

2. Exclusive access to early voting tallies
JPMorgan recently gained another advantage over activist shareholders when proxy communications and voting company Broadridge Financial Solutions (NYSE: BR  ) cut off activist investors backing shareholder proposals from information about early voting tallies. This change occurred after trade group Securities Industry and Financial Markets Association, which includes JPMorgan as a member, challenged Broadridge's decision to provide shareholders with this information.

This is significant, as it provides companies with valuable information they can use to guide their campaign strategies while depriving activist shareholders of the same information.

3. An "indispensable" leader
Finally, some shareholders may have been concerned that Jamie Dimon would resign if he were stripped of the chairmanship -- especially given the fact that some fear nobody at JPMorgan is currently prepared to step into the role of CEO.

As Yves Smith points out on her award-winning economics blog Naked Capitalism, "the fact that there is no one even remotely plausible in the [can] as successor means Dimon has made himself indispensable (well, until you remember the Clemenceau saying, 'The graveyards are full of indispensable men.')"

In other words, if Dimon is indispensable, it's because he's made himself indispensable by failing to cultivate a strong successor -- thus creating yet another obstacle to shareholders voting him out.

However, this kind of "indispensability" is not the kind shareholders should like, as it's arguably established by poor leadership and succession planning rather than stellar performance. 

The Foolish takeaway
While Dimon won this particular battle, I believe the succession concerns at JPMorgan, along with the risk, governance, and regulatory concerns, should make investors wary of the stock.

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5/27/2016 4:00 PM
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