The two largest proxy advisors in the U.S. have lined up against key leadership at JPMorgan Chase (NYSE:JPM). The ensuing proxy fight is shaping up to be the year's most exciting, as Institutional Shareholders Services and Glass, Lewis recommend that investors vote down six key directors in the wake of various scandals, including the London Whale debacle.
Not surprisingly, JPMorgan thinks those directors are doing a good job. JPMorgan counterpunched, "The members of the board's risk committee have a diversity and breadth of experiences that have served the company well," and that mistakes leading to its $6 billion London Whale losses "were not attributable to the risk committee."
Gimme a break.
At some point, I believe shareholders should stop accepting excuses and start holding leadership accountable. And the company's upcoming annual meeting provides them with a good opportunity to cause a major shakeup at the top-most levels of the company.
The view that key JPMorgan leaders have failed shareholders has led proxy advisor firms Institutional Shareholder Services (ISS) and Glass, Lewisto recommend that shareholders vote against the reelection of risk policy committee members David M. Cote, Ellen V. Futter, and James S. Crown. In addition, Glass, Lewis has recommended that shareholders vote against the reelection of three members of the board's audit committee -- Crandall Bowles, James Bell, and Laban Jackson, Jr.
These proxy advisor firms offer strong criticisms of JPMorgan's handling of risk management. ISS criticizes JPMorgan's board for being "largely reactive, making changes only when it was clear it could only maintain the status quo." Glass, Lewis suggests,"Shareholders should be concerned that Company management was allowed to build a massive exposure to credit derivatives, switch VaR models following a breach of risk limits, and value its positions so to minimize losses, and that it was able to do each of these things without triggering a board-level review or a mandatory containment of risk."
Combined, these two proxy firms advise investors to vote against 6 of the 11director nominees.
I believe allowing company management to alter risk models without board-level review implicates the board in resulting losses, and that such lax oversight of management represents the board's failure to meet key oversight obligations.
While JPMorgan's most recent proxy points outthat the board took action after the London Whale losses took place, I think shareholders should prefer a more proactive board that actively prevents management from taking such excessive risks.
And I'm not the only one who thinks so. In January, the Federal Reserve saw such severe weaknesses in JPMorgan's audit functioning, risk controls, and loss modeling that it required the board to submit a plan to enhance oversight.
Let me repeat. The U.S. government thought the board was doing such a poor job in its oversight function that it had to step in and require board members to do their jobs properly. Not good.
The Foolish takeaway
Regardless of whether these failures resulted from negligence or incompetence, I believe it's time that shareholders send a strong message to JPMorgan's leadership that they're done accepting excuses, and that they expect to see a more proactive approach to risk management. Unless some serious leadership changes take place, I think shareholders will continue to face serious risks to their investment.
Will JPMorgan investors be able to knock out six directors in this year's top fight? Keep your eyes on May 21, the date of the main event, the bank's annual meeting.