Hindsight isn’t the same as strong, independent oversight
JPMorgan also defends its current governance structure by claiming that “the Board’s actions following the losses in the CIO demonstrate strong, independent oversight.”
That’s one way of looking at it.
Here’s another: The board’s actions before the London Whale losses show such an extreme lack of oversight that U.S. regulators recently required JPMorgan Chase & Co. (NYSE:JPM)’s board to submit a plan for improving oversight. Also, even if the board had strengthened its risk management processes without regulators breathing down their necks, investors should demand processes that promote the kind of board oversight that prevents problems before they arise.
Against the recent shareholder proposal, the board also defends its current governance structure by saying, “The Board already provides the independent leadership and oversight of management sought by the proponent.” It attempts to support this claim by pointing out that all but one of the board members are independent, the board has an independent lead director, and the audit, governance, and compensation committees are entirely made up of independent directors.
However, the shareholder proposal points out (rightly) that these three features aren’t enough. After all, Chesapeake Energy Corporation (NYSE:CHK) had all three, too. That didn’t stop former Chairman and CEO Aubrey McClendon from exploiting his position to extract sweetheart deals at the expense of shareholders. In 2012, things reached a boiling point, causing a shareholder revolt that stripped McClendon of his chairmanship and ultimately led to his departure as CEO on April 1.
A structure allowing the same person to serve as both CEO and chairman still contains unacceptable conflicts of interest and compromises the ability of the board to provide effective oversight.
The Foolish takeaway
JPMorgan Chase & Co. (NYSE:JPM) concludes its argument against shareholder demands for splitting the CEO and chairman roles by claiming that shareholders should trust the board to “make that judgment based on circumstances and experience.” In other words, they want shareholders to simply trust them to make the right decision.
However, the board’s prior failures to offer effective oversight, and its continued support of Dimon despite his involvement in the scandal, give shareholders plenty of reasons to withhold their trust.
The article JPMorgan’s Absurd Defense of Its Current Governance Structure originally appeared on Fool.com and is written by M. Joy Hayes.
Fool contributor M. Joy Hayes is the Principal at ethics consulting firm Courageous Ethics. She has no position in any stocks mentioned. Follow @JoyofEthics on Twitter. The Motley Fool owns shares of JPMorgan Chase and (NYSE:JPM) has the following options: Long Jan 2014 $20 Calls on Chesapeake Energy Corporation (NYSE:CHK), Long Jan 2014 $30 Calls on Chesapeake Energy, and Short Jan 2014 $15 Puts on Chesapeake Energy.
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