Thursday, May 16, 2013

Mr. Indispensable

Mr. Invincible you are not
“The cemeteries are full of indispensable men.”

Attributed to several indispensable men

Fire Jamie Dimon.

There, that got your attention, didn’t it?

Seriously, folks, the brouhaha surrounding the upcoming nonbinding shareholder vote to separate the Chairman and Chief Executive Officer roles at J.P. Morgan is getting a bit silly. People are marshaling all sorts of weak, irrelevant, and disingenuous reasons on both sides to argue for and against the resolution. Hence we get ludicrous examples of access journalists asking a gaggle of powerful white men whether another powerful white man should lose his power. Gee, I wonder how that turned out, don’t you?

I will not bore you with a demolition of the flyweight reasons the pros are using, including envy, spite, ad hominem vitriol, and gleeful detestation of Mr. Dimon as an avatar of hated “banksters” everywhere. On the other side, however, the cons have assembled all sorts of arguments against stripping Mr. Dimon of his Chairmanship which woefully fail to address the central point of the exercise, which is good corporate governance. Some say Jamie shepherded the House of Morgan through the dark days of the financial crisis with nary a scratch, and hence should be rewarded by keeping his seat at the head of the boardroom table. Yes he did, and a boffo job at that. So what? I got really good scores on my SATs. Did that mean I didn’t have to take tests or submit papers in college? Of course not: the past is the past. Besides, J.P. Morgan sailed into the Panic of 2008 in the best shape of any of its peers, with the possible exception of much smaller Goldman Sachs, which also came out smelling like a (relative) rose. It’s not like Jamie excavated a pile of shit and turned it into gold. He started with a pile of gold and mostly kept the tarnish off. No superhero he.

Some say the evidence of outperformance by companies with bifurcated Chairman/CEO roles is lacking. Part of that is due to the all-too notable reluctance of powerful men to give up power (viz. supra), which has led to a remarkable paucity of such structures among large publicly-traded corporations. Hence, the sample set from which one can draw financial performance data is unhelpfully small. Even so, this is a remarkably lame argument, equivalent to the contention that the fact that most people who wear seatbelts never get into accidents (and, contrariwise, wearing a seatbelt does not prevent accidents) means that seatbelts are useless. Go ahead and pull the other one.

Still other FOJs contend Mr. Dimon’s delivery of $21 billion in record profits last year should silence his critics and put the kibosh on this petty attempt to strip him of rightful powers and duties. But I say the man or woman at the helm of a $2.4 trillion colossus which employs over a quarter of a million people around the globe damn well better produce some pretty amazing results, especially when so many of its largest competitors remain in disarray, the cost of funds for financial firms could not be cheaper if Ben Bernanke were backing up a dump truck full of dead presidents into J.P. Morgan’s lobby, and his privately held bank is implicitly backed by the full faith and credit of the United States government (and perhaps the European Union, too).1 The man is a CEO. He is supposed to create good results with the awe inspiring assets he has at his disposal. He did. Big whoop. Give the man a fucking fruitcake.2

* * *

But all this is smoke and mirrors.

The entire point of separating the roles of Chairman of the Board and Chief Executive Officer is that they have different responsibilities and duties. They are different jobs. Now, perhaps at smaller companies with simple business models and uncomplicated objectives (grow revenues fast enough to meet payroll and pay the bank on time), there is no practical need to separate them. But the bigger a company gets—and I think we can all agree J.P. Morgan is about as big as a firm can get—the breadth and scope of duties each role properly possesses expands dramatically. The CEO is supposed to be the chief employee, leading his or her organization to deliver on the agenda and objectives the Board of Directors has set. The CEO is an operating executive.

The Chairman, on the other hand, is supposed to lead the Board of Directors in setting the agenda, strategy, and objectives of the corporation, in response to its employers, the shareholders, and all the other myriad stakeholders (employees, regulators, government officials, vendors, community members, and customers) which have a say or a stake in the activity of the firm. The Chairman and other directors of the corporation are stewards. They are not supposed to get down in the weeds, day to day, operating the various parts of the business. That is the CEO’s job. But as stewards they are supposed to think about the what-ifs, the perils and opportunities that may or may not confront the firm in the future, and the problems and threats which may be festering beneath the glittering surface of excellent corporate performance. A properly engaged CEO doesn’t have time to worry about such matters. He has a day job to perform.

The other key duty of the Board, with the Chairman at its head, is oversight. The Board is supposed to monitor the performance of the CEO and his or her key executives: guide, correct, discipline, and incentivize him or her to perform in a way which achieves the objectives they have set and satisfies the other constraints the firm must operate under. Even the meanest intelligence can see that having the Chairman and CEO of a firm be the same person collapses this crucial function into irrelevance:

“Gee, Jamie, do you think you’re performing adequately in the public relations part of your job?”
“Why, yes, Jamie, I think I’m doing a great job, don’t you?”
“Sure I do! Have a cigar.”

Of course, a soi-disant superman CEO could surely set his own agenda and monitor his own performance—just as his lesser peers can certainly contribute their valuable perspectives on such matters to their Boards—but such arrangements diminish the patently obvious benefit of involving more than one person’s perspective in the issue. Not to mention short-circuiting the potential for meaningful criticism and disagreement over firm challenges, issues, and threats which merit serious discussion. I don’t care how big your head is, two heads (or more) are always better than one.

The role of the Board as stewards of the firm and monitors of the CEO and his or her executive team naturally introduces a healthy tension into the governance of a large organization. A Board which is properly performing these duties will have occasion to challenge, correct, punish, reward, and occasionally fire a CEO. Find me a person who could legitimately do this to him or herself and I will show you a person who is temperamentally unsuited to the role of CEO. They just don’t make psychopaths that way.

* * *

So much for principle and common sense.

The real reason to strip Jamie Dimon of his Chairmanship is that he has done a shitty job at it. He has failed to accomplish one of the most important, difficult, and basic tasks a Chairman is supposed to do: establish a succession plan for the CEO. Each and every Board worth its perks and compensation should make finding and grooming successors to the firm’s current senior executives—especially the CEO—its most important agenda item. Not only has Jamie failed at this, he has actively fired key lieutenants and potential successors like Bill Winters and Steve Black, apparently on the basis that they posed too credible a threat to his own power.

The fact that certain people find Jamie’s petulant whining that he may quit if shareholders vote to strip him of the Chairman role a credible threat is proof positive that the current Chairman of J.P. Morgan has done a lousy job preparing for the inevitable eventuality that Dimon will have to be replaced. The current Chairman has also done a lousy job cajoling the current CEO to delegate more of the minutiae of running a place as gigantic and complex as J.P. Morgan to trusted lieutenants, and to train and mentor those lieutenants into a position where they can ultimately replace him. That these are related issues, and practices which strike at the very heart of the purported indispensability of any Chief Executive Officer, is highly revealing.

Finally, the current Chairman has done a lousy job selecting his other Board members, particularly in the all-important area of audit and risk management. The risk oversight and monitoring function at a gigantic, staggeringly complex lending and trading bank like J.P. Morgan is arguably the most important one—after CEO succession—a Board has. Yet Jamie stacked his risk committee with a former lawyer and professional board member previously on the risk committee at AIG who currently heads a natural history museum, a rich kid whose life experience consists of managing grandad’s money, and the CEO of a a flight controls company. I will wander way out on a limb here and bet these people couldn’t evaluate the financial risks of a childrens’ lemonade stand, much less one of the largest banks on the planet.

The current Chairman of J.P. Morgan has done a crappy job in almost every dimension that can be measured. And don’t point me to his lead director Tweety Bird, either. I don’t care how fearsome Lee Raymond’s reputation as a former imperial Chairman and CEO was, it is clear he can’t get Jamie Dimon to return his phone calls, much less address the critical areas of underperformance I have identified.

The agenda is clear: the current Chairman of J.P. Morgan should be run out of town on a rail. The current CEO can stay, assuming a new, effective, powerful Chairman thinks he’s up to snuff. Clearly somebody needs to smack that knucklehead around a little.

Fortunately, Jamie, you will be relieved to hear I am not available.

Related reading:
To Catch a Thief (February 13, 2009)
J.P. Morgan and the Marlboro Man (May 20, 2012)

1 Want to deny this? Envision, if you can, whether the US government would let anything happen to all of $2.4 trillion, 256,000 people strong J.P. Morgan if it got into serious trouble. Do you for a minute think they would let it crater like Lehman Brothers? That they would even consider it? I didn’t think so.
2 Or, say, $20 million.

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