Investors are demanding change at JPMorgan.
On Monday, a group of them issued a letter stating that JPMorgan should split the roles of board chair and CEO. The combined position is currently helmed by Jamie Dimon. Of course, Dimon held the dual role during the infamous “London Whale” debacle that cost the bank roughly $6 billion, according to reports.
The disgruntled investors believe that splitting the chair/CEO roles is necessary to restoring credibility with regulators and improving the bank’s management. Further, they believe too much power is concentrated in Dimon’s position.
They are absolutely right. Dimon should be relieved of his chair duties. Here’s why.
Consider how two hypothetical—but typical—board meetings play out.
In the first scenario, a single person occupies both the chair and CEO roles, like Dimon does. A second person, independent of management, acts as a “lead director.” The lead director does not chair the actual board meeting, nor does he or she have the final say on the board agenda. The lead director does not control the information flow the board receives, either.
Simply put, the lead director has influence, but the board chair has actual authority. This proves problematic when the chair is also the CEO. The most important role a board chair has is to control the discussion and how decisions get made (or not). If the person controlling the discussion, the information and the agenda (the chair) has a vested interest in the outcome (the CEO), there is an inherent bias in all decisions. The board’s fundamental oversight role to control management is compromised.
The disgruntled JPMorgan investors did a fine job of making these points in their letter: “An independent chair of the board of directors will eliminate the structural conflict of interest caused by the CEO being his own boss, and will clarify where the authority of the CEO ends and responsibility of the board begins.”
In the second scenario, board meetings are conducted with chair and CEO roles held by separate people. When I observe these meetings, the dynamics are very different. There is a natural counterpoint that occurs because the CEO is removed from the proposal and approval parts of the discourse. Also, directors feel free to speak up because the chair is one of them (independent).
For quite a while, Canadian bank boards argued that good governance could be achieved despite the inherent conflict of a combined chair/CEO role. Back in 2003, the Office of the Superintendent of Financial Institutions (Canada’s financial institution regulator) stated that independence could be met with either a non-executive chair or lead director. The choice was up to the board, the OFSI said.
Fortunately, things have changed.
Shareholders and regulators have prevailed in Canada, the U.K., Australia and New Zealand, where non-executive chairs are the norm. In its governance reforms for 2013, the OFSI stated that the role of the chair should be separate from the CEO. This separation, said the OSFI, “is critical in maintaining the Board’s independence, as well as its ability to execute its mandate effectively.”
The fact of the matter is that having a non-executive chair won’t guarantee success or prevent failure. Academics cannot prove a systemic relationship between board leadership and performance because chair effectiveness is so difficult to measure.
But there’s a much greater likelihood of better governance with an effective non-executive chair. I have yet to see a lead director as effective as an independent chair who possesses real authority. Thankfully, more and more American corporations are splitting the combined CEO/chair role and are using effective, non-executive chairs. JPMorgan should join them.
Richard Leblanc is a lawyer, corporate governance academic, speaker and independent advisor to leading Canadian and international boards of directors. He can be reached at firstname.lastname@example.org.