Warren Buffett has long admired the skills of JPMorgan Chase (NYSE:JPM) Chief Executive Officer and Chairman Jamie Dimon, and praised the executive in his annual letter to shareholders. But many investors have begun to question whether he has made too many mistakes during his tenure to hold both positions. On a related note, analysts and shareholders have also begun to wonder whether he has too much power.
For many years, Dimon and other executives have hand-picked new directors, a practice that is now considered unusual for a major U.S. bank. All of the other ten largest banks in the United States have said they use executive search firms, which enable them to review a range of possible candidates. Instead of following this method, the JPMorgan board of governance committee, which is responsible for hiring new board members, depends almost entirely on referrals from management. Previously, little was known about the bank’s method of hiring new directors.
This revelation may prompt an examination of the banks’ selection processes and further questions about how much influence Dimon wields over the bank’s board. The shareholder vote next Tuesday will decide whether the board should strip him of the chairman title and give it to another director. If the board votes to split the roles, Dimon’s actions as chief executive will be under increased oversight.
Dimon managed told hold onto both positions even after it was revealed that a single trader, Bruno Iksil — now known as the London Whale — lost more than $6 billion from roguish derivative trades last year, but the deep problems that the loss revealed have haunted both Dimon and JPMorgan. Hearings held by the Senate’s Permanent Subcommittee on Investigations to determine how the bank was able to rack up such massive losses found that JPMorgan dodged regulators, misled investors, and manipulated risk models to hide the mounting losses.
Now, it has been divulged that Dimon selects directors in a manner that creates the appearance that the board may be too close to Dimon and his senior management team, according to corporate governance experts. But bank spokeswoman Kristin Lemkau told Reuters Wednesday that the board has not found executive search firms to be useful. “Many of the director candidates for our board are names already well known to the business community,” she said. Former Boeing (NYSE:BA) Chief Financial Officer James Bell, who joined the board in November 2011, is one such example.
The eleven-member board can be considered strong and relatively independent by most corporate standards; in regulatory filings, ten directors are described by the bank as independent from management. Former Exxon Mobil (NYSE:XOM) Chief Executive Lee Raymond is the lead independent director, and several important shareholders believe he acts as an effective counterweight to Dimon.
The problem is that no director other than Dimon has significant banking industry experience, a flaw that began to concern investors last year after the trading loss. “This board doesn’t have the bench, the expertise, the supporting cast,” Michael Pryce-Jones, an analyst at CtW Investment Group, told Reuters. The firm acts an adviser to union pension funds owning about 6 million JPMorgan shares and is pushing for changes to the bank’s board.
Proxy adviser Institutional Shareholder Services has already recommended that Dimon’s job be split into two positions, especially as the experience of the remaining directors on the risk committee lacked experience in risk management, financial regulation, and other relevant areas.
Rampant financial troubles forced Citigroup (NYSE:C) and Bank of America (NYSE:BAC) to restructure in the wake of the financial crisis, but both banks chose candidates well-suited to the banking business. At that time, Citigroup added eight directors with experience in regulatory and risk management, according to ISS. Bank of America added five directors, including a former governor of the United States Federal Reserve. Both these banks used searched firms, as do all other major U.S. banks in similar circumstances. Only JPMorgan relies on the recommendation of its management.