Whether or not separate, the focus of an organisational structure should be on maintaining effectiveness of the board
Any institution especially a behemoth like J.P. Morgan cannot be held ransom to individual demands
The lobbying efforts by J.P. Morgan for Jamie Dimon, reemphasizes the importance of having a pipeline of successors for an organisation
On May 21st this year Jamie Dimon reinforced his status as the most the powerful banker in the United States and proved his detractors wrong when 67.8 per cent of the shareholders voted in favour of him retaining his dual role as Chief Executive Officer and Chairman of the board of J.P. Morgan Chase & Co.
The idea to have the two roles separated came in the wake of the multi-billion dollar trading fiasco, London Whale trading loss at J.P. Morgan (JPM) that tainted Dimon’s reputation as Wall Street’s best banker although he was able to steer the bank through the crises and post record profits. The London Whale trading debacle raised questions about Dimon’s ability to effectively oversee the bank’s day-to-day operations along with the strategic matters as the Chairman of the board. And his critics argued that the spilt would be a step towards better corporate governance at the bank.
What is the big deal about having a split structure?
Advocates of the split structure where two different people hold the positions of the Chairman and the CEO claim that this model leads to strong performing companies and shareholder friendly governance. Since the two positions are the most authoritative in the boardroom, when these roles are combined all authorities are vested in one individual and there are no checks and balances and no balance of power. Instead, if two different people of equal authority and stature head the two positions the centre of authority is diffused leading to increased independence of the board. This argument is based on the agency theory of corporate governance which talks about increasing the board’s independence leading to better monitoring and oversight. Holders of this view see a conflict of interest if one person occupies both the CEO and Chairman roles.
A striking contrast to this is the stewardship or administrative theory that is based on the principle of “unity of command” and argues that having clear and unambiguous authority concentrated in one person is essential to effective management. Unity of command creates clear lines of authority to which management can respond more effectively.
However a recent report by Matteo Tonello, Director, Corporate Governance, The Conference Board, suggests that there isn’t much evidence to prove whether firms with split structures actually perform better than those who don’t. In fact a recent research report suggests that even a formally independent chair does not necessarily mean that it has an independent mind. Indeed the focusing primarily on separation of Chairman and CEO roles may omit a key dimension of effective board leadership. Whether or not separate, the focus of an organisational structure should be on maintaining effectiveness of the board.
It is not about Dimon’s capabilities, it is rather about the absence of a succession plan
Whether to have separate people for the position of CEO and chair is debatable. With a proven track record on corporate performance, delivering record profits even in a stagnating economy and steering the bank safely through financial crises, Dimon has consistently demonstrated that he is the most capable banker on Wall Street and possibly the best person to lead the biggest bank of the United States at this moment. And there is no questioning about his ability. That he is proving to be too big to handle and almost indispensible for J.P. Morgan is what needs to be looked at. The discussion rather should be about the concentration of power in one person, an institution, an industry and it is far from being isolated. It is not about Dimon, it is about the system, the economy, the country. In reality J.P. Morgan is too big to fail and that too for lack of a proper succession plan is a risk that can surely be averted.
In fact this debate about whether to have separate people as the CEO and the Chair has taken the attention away from the absence of a successor who could step into Dimon’s shoes should he choose to leave. As per a leading international business journal, Dimon had spoken about a possibility to leave J.P. Morgan if shareholders voted to separate the role of Chief Executive Officer and Chairman of the board, in a private meeting with investors in the bank’s headquarters. Dimon’s departure could have led to the falling share prices for J.P. Morgan and voting for Dimon to lose chairmanship could have resulted in a lower stock value for shareholders. This led to the bank lobbying for Dimon in a way that was described more like a presidential campaign than a normal lobbying effort. The point to be noted here is that the vote was non-binding and the results could have been overruled.
For an institution like J.P. Morgan to go in frenzy just because its top shot threatened to quit if he didn’t get what he wanted is not a right message to be sent to shareholders, economy and Dimon himself. J.P. Morgan is the biggest bank in the United States with more than $2 trillion in assets and virtually no successor who could replace Dimon. What else could explain this frenzied lobbying for him to be able to retain the top two jobs so that he doesn’t leave.
His past track record proves that Dimon is probably the best person for the role at present. That said, the current pipeline of successors who could be groomed for the top job isn’t as impressive either. Matt Zames the bank’s sole Chief Operating Officer (COO) is touted to be the frontrunners among the successors. However, James has come from credit rating –an area of business that got the bank into trouble. Others in the pipeline are Michael Cavangah, who co-heads J.P. Morgan’s investment and corporate bank and has been the CFO for some time, Daniel Pinto, who heads most of the overseas businesses of J.P. Morgan and Mary Callahan Erdoes who heads the bank’s asset management unit.
Why having a succession plan is critical to the business
There have been numerous examples of high profile companies – AIG, General Motors, Sears, Xerox etc that suffered an unplanned CEO departure and were caught off-guard when they had to name a replacement. No CEO comes with a lifetime guarantee and there has to be someone waiting in the wings, who can step up when situation demands. Any institution especially a behemoth like J.P. Morgan cannot be held ransom to individual demands. If J.P. Morgan fails, it could lead to another financial crises and the economy is still to emerge from the last one.
Quoting the book on succession planning, “The Leadership Pipeline”, “A crisis in leadership is the result of a company-wide breakdown rather than the actions or failure of one person. Moreover, finding the perfect CEO does not really solve the crisis, nor does getting people from outside to fill senior leadership positions. In fact, going outside is an admission of failure and not very likely to succeed. Hiring an outsider reflects that a company has not been able to successfully develop a pipeline of leaders from among its ranks who can step in and manage the bigger challenges of the day. Uncertain succession processes can also sap investor confidence”. Like in this case where shareholders were sure that they will lose money if Dimon chooses to leave.
As per a report by Russel Reynolds Associates an Executive Search and Leadership Assessment firm, “CEO transitions generally are vulnerable times for company valuations - investors are twice as likely to sell shares during a CEO transition than buy them - boards have a strong bottom-line incentive to have transitions unfold as smoothly as possible. In addition, rating agencies now factor succession planning into their pronouncements, and the U.S. Securities and Exchange Commission (SEC) no longer allows public companies to disallow shareholder proposals regarding succession planning under the “ordinary business matters” rule. Instead, succession planning is viewed as a “significant policy issue regarding the governance of the corporation” and thus appropriate for shareholder debate.”
Given the direct cost impact of short-changing succession plan being extremely high, boards have to ensure that there is a succession plan in the works for all key executives especially the chief. While the cost impact creates a sense of urgency, the stronger reason for having a seamless succession plan lies in the examples of firms that have been able to consistently retain investor confidence by doing it well.
The immediate task at hand for the biggest bank of the United States is to create a strong succession pipeline that can sustain the success that Jamie Dimon has created, in case he ever chooses to leave.