Jamie Dimon has finally got what he wanted and he is going to remain as both CEO and Chairman of the Board at JPMorgan Chase & Co. (NYSE:JPM). Unfortunately for investors in the company, Dimon´s victory is comes at the expense of better corporate governance.
Two different jobs
There is a reason why CEO and Chairman of the Board are separate jobs; they are two different roles with their own duties and responsibilities. While the CEO is in charge of leading the organization on a day to day basis towards the achievement of its strategic and financial goals, the Board has several other responsibilities, and supervising the CEO is one of them.
The Board should, in theory, elect the CEO and monitor her or his performance, making sure that the CEO ´s incentives are aligned with the interest of shareholders, challenging decisions, correcting mistakes, and even firing the CEO when necessary.
In some cases, when the business is small and simple, this may not be a big deal. But when it comes to JPMorgan Chase & Co. (NYSE:JPM), the bank is exactly the opposite of small and simple: the House of Morgan is a gigantic organization with intricately complex operations and investments in different areas all over the world.
The London Whale scandal should serve as a clear reminder about the importance of having an independent Chairman at a company like JPMorgan Chase & Co. (NYSE:JPM). Dimon admittedly knew about the size and complexity of these trades, but the risk models were obviously flawed, and he has publicly stated that internal controls failed in a catastrophic way.
Dimon was quite vocal about his responsibility for the London Whale scandal, calling the incident: “the stupidest and most embarrassing situation I have ever been a part of,” he also admitted in a testimony to Congress that he was “absolutely responsible” for what happened.
Even if Dimon is completely sure that something like that can never happen again at JPMorgan Chase & Co. (NYSE:JPM), an independent Chairman could be quite helpful when it comes to increasing control and oversight. Shareholders, clients, and regulators would probably welcome more transparency at the bank considering recent history.
A good CEO, a lousy chairman
Even after the London Whale scandal, most industry insiders agree on the fact that Dimon is one of the best CEOs in the industry. JPMorgan Chase & Co. (NYSE:JPM) came out of the credit crisis in a better shape than other competitors, and this has allowed the bank to position itself for growth in the post crisis recovery.
JPMorgan overtook Bank of America Corp (NYSE:BAC) as the biggest bank in assets during 2011, while Bank of America Corp (NYSE:BAC) was still trying to streamline its operations and clean up its balance sheet, Dimon was reporting record profits for JPMorgan shareholders that year.
The difference in profitability is still remarkable nowadays, while JP Morgan has a return on assets ratio of 0.97% and return on equity of 11.3%, Bank of America is well behind with 0.23% in return on assets and 1.64% in return on equity.
Not only in terms of past performance and current profitability has Dimon done a good job, JPMorgan is now the second biggest mortgage lender in the country with $57 billion in mortgage originations for the first quarter of 2013, while Bank of America – the industry leader before the crisis – originated less than $24 billion.
The mortgage market will have its ups and downs over the next quarters; but, from a long term point of view, it still has plenty of room for recovery, so it should be a big growth driver for the bank over the next years, and Dimon should be at least partially credited for this.
On the other hand, while JPMorgan did much better than other competitors under Dimon´s leadership – he was named CEO on December of 2005 and Chairman of the Board on December of 2006 – it didn´t do as good as the top quality player in the industry: Wells Fargo & Co (NYSE:WFC).
Wells Fargo & Co (NYSE:WFC) has a much simpler business model; avoiding risky investments and complex derivatives, the bank is simply focused on doing what it does well, loaning its money to deserving clients. This provided the financial soundness to stay mostly out of trouble during the credit crisis, and Wells Fargo even seized the chance to acquire Wachovia at an opportunistic price back in 2008.
Wells Fargo is now the undisputed leader in mortgage originations with more than $109 billion in home loans during the last quarter, way above JPMorgan´s share. Wells is also more profitable, with return on assets of 1.46% and return on equity at 13.45%.
This comparison is particularly interesting because Wells Fargo doesn’t separate the CEO and Chairman position either, John Stumpf is the CEO since 2007 and became Chairman in January 2010, yet the bank is exemplary when it comes to risk management and overall performance over the last years.
However it´s not an apples to apples comparison, Wells Fargo could hardly lose $6.2 billion in a complex derivatives trade like JP Morgan did with the London Whale scandal since it has a much simpler business model. I still wouldn´t mind seeing the CEO and Chairman positions split in Wells Fargo, if only for transparency and oversight reasons, but it´s a far more important issue when it comes to JPMorgan, especially considering that the London Whale episode happened under Dimon´s watch.
Dimon was rumored to be thinking about leaving the bank if he was stripped from this Chairman role, and this may have been a big factor behind his victory in the voting. There is no good candidate for succession at JPMorgan, so investors have valid reasons to be concerned about this potential problem.
One of the jobs of the Chairman is to make sure there is a solid succession plan should the CEO leave for any reason, but Dimon didn´t fulfill that responsibility. Ironically, by scaring shareholders when making them realize how indispensable he is for the company as a CEO, he also proved he is a lousy chairman.
Bottom line
As a general principle, it´s better to have and independent Chairman so the CEO can be adequately controlled and evaluated, especially in a big and complex organization like JPMorgan. Dimon may be a good CEO, but he is quite a mediocre chairman, so it looks like he won and investors lost when it was decided that he is keeping both positions.
The article Dimon Is a Good CEO and a Lousy Chairman originally appeared on Fool.com and is written by Andrés Cardenal.
Andrés is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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