As the US regular TV season comes to a close, the top dramas are setting up cliffhangers to keep us interested next season. Characters we had grown to love are being put to the sword, relationships strained to breaking point and pyrotechnics are everywhere. Something similar just happened today at JP Morgan Chase.
By now everyone has read the news. Not only did Jamie Dimon win his battle to keep his roles both as Chair of the Board and as CEO, but the Corporate Governance technocrats were soundly thrashed as the share of votes opposing the combination of CEO with Chair of the Board plummeted by 8 points from 40% last year to 32% this. Dimon had made this battle personal, telling the world that he “enjoyed” the two roles and hinting darkly that he might take his bat and ball home with him if the shareholders did not agree. You couldn’t script this stuff any better if you were making a TV drama out of it. But, behind all the personality and the drama, what is really at stake here?
Opinions are mixed. According to PwC’s Center for Board Governance, 43% of S&P 500 boards currently separate the role. Shareholder advocacy groups such as ISS claim there is an outright conflict when a CEO is also the Board Chair. How can the Board conduct its oversight role over management if it is itself led by the top manager? This is the typical “fox guarding the hen house” .Companies in Continental Europe have long since practiced complete separation between Managing Boards and Supervisory Boards without suffering any operational ill effects. So why, then, does the US insist on being a Corporate Governance laggard?
‘Not so fast’ say the other side. There are studies that show no provable link between a separation of Board Chair and CEO with improved Corporate Governance (see Enron and WorldCom). Not only this, there are Lead Directors today who essentially determine the Board agenda and who step in when the CEO/Chair has to recuse him or herself. And finally, doesn’t it really depend upon the character of the individuals in the roles? If you have the wrong Board Chair who doesn’t interact effectively with the CEO then perhaps this stifles information that needs to come to the Board making it less effective than a collaborative CEO sitting in the Chair’s seat? Finally, it has been suggested that the complexity of the business at JP Morgan Chase was one compelling reason not to remove the CEO from his position as Chair of the Board.
On the face of it the showdown at JP Morgan Chase settles the issue. A high profile battle has been decisively won and the few remaining may just follow suit. According to PwC, there are only 14 shareholder proposals on this issue this year. However, two questions remain unanswered for JP Morgan Chase and the 57% that combine these roles. First, are we confusing good Governance with competence, seeking combined roles to make up for a Board’s difficulty in getting close to the company? Second, when shareholders are convinced by management to hand over the keys to their oversight body, how forgiving will they be the next time that oversight falls short ?
Stay tuned for more drama in next year’s proxy season.