A coalition of investors including the AFSCME Employees Pension Plan, the Connecticut Retirement Plans and Trust Funds, Hermes Equity Ownership Services and the NYC Pension Funds, has filed a shareowner proposal calling on JPMorgan Chase (NYSE: JPM) to name an independent board chairman. JP Morgan Chase shareowners will vote on the proposal at the company’s 2013 annual meeting in May.
The coalition’s decision to jointly file the proposal in 2013 reflects mounting investor concerns with the board’s oversight in the wake of the London Whale losses, recent regulatory sanctions, and its failure to fully demonstrate that it can manage the size and complexity of its balance sheet. A virtually identical proposal received an impressive 40 percent favorable vote in 2012 after the AFSCME Employees Pension Plan submitted it for the bank’s 2012 annual meeting.
A clear conflict of interest exists when a company’s board of directors, which is responsible for overseeing the company’s CEO, is chaired by the CEO. This conflict is heightened by the fact that the CEO provides the board with the information it depends on to oversee business practices and assess risk management. The coalition believes that the perpetuation of this conflict of interest in JPMorgan Chase’s management has the potential to adversely affect the value of their investments in JP Morgan Chase and should be eliminated.
AFSCME’s 1.6 million members provide the vital services that make America happen. With members in hundreds of different occupations — from nurses to corrections officers, child care providers to sanitation workers — AFSCME advocates for fairness in the workplace, excellence in public services, and prosperity and opportunity for all working families.
JPMorgan Chase has acknowledged that its own internal controls, which were certified by the CEO and accepted by the board, did not provide adequate oversight to protect against the so-called London Whale trades. Earlier this month, e-mails were released evidencing deliberate overrides by JPM employees of quality controls in the mortgage market. In addition, the Federal Reserve and the Office of the Comptroller of the Currency both issued cease-and-desist orders last month requiring JPMorgan Chase to tighten its oversight in connection with trading and money laundering.
“Unchecked risk-taking and oversight failures have cost JPMorgan more than $6 billion in losses and seriously damaged its reputation,” said NYC Comptroller John C. Liu, who is investment advisor, custodian, and trustee of the New York City Pension Funds. “Without an independent board chair, JPMorgan will be unable to restore investor confidence and ensure future compliance — both integral to protecting and creating long-term value.”
Connecticut Treasurer Denise L. Nappier – principal fiduciary of the $26 billion state pension funds -- said, "Suffice it to say, at the heart of the company’s failures in managing risk and developing a strong corporate culture of ethics, accountability and transparency is the question about independence. It is impossible to imagine how board oversight of the company’s affairs will be strengthened while CEO Jamie Dimon leads the very board that is charged with overseeing his own shortcomings. JP Morgan Chase needs an independent chair to address these significant governance issues as a forerunner to protecting and enhancing long-term shareholder value, and doing so in a responsible manner.”
“Even a Master of the Universe can be swallowed by a London Whale. We need a system of checks and balances to protect shareholders,” said AFSCME President Lee Saunders, who also serves as the Chair of the AFSCME Employees Pension Plan’s Pension Committee.
Leon Kamhi, Executive Director, Hermes Equity Ownership Services, said, “Combining the roles of Chairman and CEO not only confuses the responsibilities, but it overly concentrates power in one individual, creating oversight and accountability problems, Moreover, we believe this is a core principle for good corporate governance.”
A separation of the CEO and board chair duties is widely acknowledged to increase a company’s accountability and performance. Companies that maintain an independent board chair outperform those that do not. A June 2012 report by GMI Ratings found that five-year shareowner returns were nearly 28% higher at companies with a separate CEO and board chair. More and more companies have independent board chairs. Institutional Shareholder Services, a leading independent proxy advisor, reported that 21.5% of S&P 500 firms had an independent chair in 2012, up from 18.1% in 2010.
The AFSCME Employees Pension Plan held 74,984 shares of JPM as of November 1, 2012. The Connecticut Retirement Plans and Trust Funds held 1,391,999 shares as of December 27, 2012. Hermes Equity Ownership Services represented 5,506,885 shares as of December 31, 2012. The New York City Pension Funds are composed of the New York City Employees’ Retirement System, Teachers’ Retirement System, New York City Police Pension Fund, New York City Fire Department Pension Fund, and the Board of Education Retirement System. The New York City Pension Funds held 9,747,342 shares of JPMorgan valued at $479,764,173.24 as of February 14, 2013.
THE FULL TEXT OF THE SHAREOWNER PROPOSAL:
RESOLVED: The shareholders of JPMorgan Chase & Co. (“JPM”) request that the Board of Directors adopt a policy, and amend the bylaws as necessary, to require the Chair of the Board of Directors to be an independent member of the Board. This independence requirement shall apply prospectively so as not to violate any contractual obligation at the time this resolution is adopted. Compliance with this policy is waived if no independent director is available and willing to serve as Chair.
JPM CEO James Dimon also serves as chair of the board of directors. We believe the combination of these two roles in a single person weakens a corporation’s governance which can harm shareholder value. As Intel’s former chair Andrew Grove stated, “The separation of the two jobs goes to the heart of the conception of a corporation. Is a company a sandbox for the CEO, or is the CEO an employee? If he’s an employee, he needs a boss, and that boss is the board. The chairman runs the board. How can the CEO be his own boss?”
In our view, shareholder value is enhanced by an independent board chair who can provide a balance of power between the CEO and the board, and support strong board leadership. The primary duty of a board of directors is to oversee the management of a company on behalf of its shareholders. We believe that a CEO who also serves as chair operates under a conflict of interest that can result in excessive management influence on the board and weaken the board’s oversight of management.
An independent board chair has been found in academic studies to improve the financial performance of public companies. A 2007 Booz & Co. study found that in 2006, all of the underperforming North American companies with long-tenured CEOs lacked an independent board chair (The Era of the Inclusive Leader, Booz Allen Hamilton, Summer 2007). Another study found that, worldwide, companies are now routinely separating the jobs of chair and CEO: less than 12 percent of incoming CEOs were also made chair in 2009, compared with 48 percent in 2002 (CEO Succession 2000–2009: A Decade of Convergence and Compression, Booz & Co., Summer 2010).
We believe that independent board leadership would be particularly constructive at JPM, where the “London Whale” trading fiasco, in which our company recorded $5.8 billion of principal transactions losses from the synthetic credit portfolio, “tainted Mr. Dimon’s reputation as one of Wall Street’s best risk managers, and raised questions about the board's oversight” (“Cold Eye Over ‘Whale’ Probe,” Wall Street Journal, August 20, 2012). In connection with those losses, JPM acknowledged that its “framework for managing risks and risk management procedures and practices may not be effective” (10-Q). This proposal received 40 percent support in 2012 days after the first “London Whale” loss disclosure (“Did the Timing of Disclosure Save Jamie Dimon’s Job as JPMorgan Board Chairman?” New York Observer, May 16, 2012).