Most U.S. corporations appoint the same person as CEO and the chairman of board. This raises many question marks on the effectiveness of their corporate governance practices. Especially in the wake of the recent financial crisis our markets can ill-afford more corporate governance relaxation which further erodes the already feeble trust of consumers.
This practice becomes even more dangerous in the U.S. financial sector where corporate governance practices remain controversial. Poor corporate governance is an issue which is of more concern to a bank's depositors than it is for a manufacturing company's customers. This is because the depositors' have entrusted their banks with their hard earned money and require regular checks and balances, especially since the financial crisis. Only an independent chairman of the board can ensure the integrity of these checks.
Repercussions of poor corporate governance
Since the last year's "London Whale" incident, JPMorgan's (JPM) stakeholders are looking to separate the roles of Chairman and CEO. Currently, Mr. Dimon assumes the roles of Chairman and CEO of JPMorgan. Some large investors are supporting Dimon to retain both roles. The London Whale incident, which cost the bank more than $6 billion, prompted many questions concerning the extent of controls and the level of supervision at the board. According to the news, non-binding shareholders' voting on the matter of splitting the role of chairman and CEO will take place on next Tuesday. Last year, 40% of the shareholders voted to split the role, which could put pressure on the bank to respond.
Risks of JPM's split in roles
"To me, in periods of great change, continuity of the leadership team and structure, especially under his strong leadership, is the best path. A change in structure is unwarranted, and could be counterproductive."
Paulson is not against the split of the roles of the chairman and chief executive, but according to him, JPMorgan's split may not be beneficial. There is a possibility that Dimon decides to go home in case he gets a vote of no-confidence, and there is little probability that shareholders will vote to divide the two roles.
For a financial company, its reputation and its human capital are the two most valuable assets. While JPMorgan is in the news these days for all the bad deeds, I believe a split in the roles will lead the bank to lose another key asset; its CEO. Therefore, I believe the split would not be in the best interest of the bank, particularly when there is no definite successor.
Benefits of the split and shareholder activism at Citi
Vikram Pandit was the former chief executive of Citigroup (C), who stepped down on 16th October, 2012. Currently, Michael Corbat, a graduate from Harvard is serving as the new CEO of Citigroup. According to senior executives and advisors, Pandit's resignation came after a clash with the board over the bank's performance because the directors were feeling that the company wasn't being managed effectively, leading the bank's stock price to depreciate 89%. Also, the directors were of the view that the CEO's compensation was not properly tied to the bank's performance, which is why Vikram was forced to resign.
Mr. Corbat is trying hard to distinguish himself from Vikram Pandit with aggressive plans, one of which is the use of score cards to evaluate the performance of the directors, which distinguished him from his predecessor CEO. In 2012, Citigroup paid Michael Corbat a compensation of $11.5 million, including cash bonuses. JPMorgan's share price has increased by almost 40% in the last 7 months, and the net margin for the first quarter of 2013 has improved by 218% over the previous quarter.
Opportunity for Goldman Sachs
Some months back, CTW Investment Group, a 25% shareholder of Goldman Sachs (GS), sent a proposal to divide the role of Goldman chairman and CEO. Investors had requested that the chairman's role should be given to an outsider who has never served an executive title role at the company, but Goldman refuses to divorce the chairman, CEO role.
However, the issue regarding the compensations paid to its top management is not yet resolved as Goldman remunerated its top executive more than the standard of his peer group while the company performed relatively worse than its peers. Therefore, now is the chance for Goldman's shareholders to show some activism and attach the top executive's compensation to the bank's overall performance.
While the split appears a better option for most companies, it does not guarantee shareholders' best interests. Investors should not forget Enron, which also had a split structure. The shareholders of JPMorgan would be at more ease if the two roles were kept by the same person but the same doesn't hold true for other money center banks like Goldman Sachs.