Raging debates about whether or not the CEO and Chairman roles at J.P. Morgan Chase should be divided have centered on the skills and personality of Jamie Dimon who currently holds both positions. Shareholders of J.P. Morgan Chase will vote on this issue at their annual meeting on May 21, 2013. They should not focus on the particular skills of Dimon, but rather on core issues of good governance.
If the issue was just about the management skills of Dimon, then his record should suffice to allow him to keen the two top posts. But, the much more substantive context that should be considered needs to embrace the health of our global financial system and whether banks like Chase today can be well-managed at all.
Successful global banks have grown and become enormously more complex in recent years. These leviathans operate in dozens of countries and dozens of markets. Their employees come from a multitude of nations. Whether they are known as Citi, HSBC, J.P. Morgan Chase, Barclays, UBS, Deutsche, all seem to be accident prone.
Despite myriad official regulations and an enormous burden on the banks to find ways to comply with the ever-rising volume of new reporting requirements, the fact is to quote former U.S. Defense Secretary Donald Rumsfeld in another context, "stuff happens." That "stuff" may range from a formidable trading loss, attributed to the "London Whale" at J. P. Morgan Chase; to full-scale LIBOR interest rate manipulation by Barclays and UBS and many others; to global international money laundering by HSBC. While the banks deploy ever more risk managers and construct ever more sophisticated risk management models, the costly errors and the cases of malfeasance abound.
Concerned with the systemic risks that a particularly expensive accident might have at a giant bank, the authorities have been increasing capital requirements and contemplating leverage ratio reductions. Such measures may to a degree reduce the danger of a full-scale 2008-type financial crisis, but it also adds to the management burdens at the banks themselves.
This is the context that ought to be fully considered as shareholders in giant financial services firms determine whether the positions of CEO and Chairman should be divided. Breaking up the biggest banks because they are perceived as "too big to fail" is unrealistic. What is needed, however, are improvements in the transparency and the accountability of governance in these institutions.
The major banks should all have "living wills" that detail how they would be carefully wound-down and, if necessary liquidated, or merged in part into other institutions, in the event that they failed. The "living wills" should be determined by the board of directors and its key outlines should be made known to shareholders. This is a governance issue - not one that should directly involve the CEO, the top institutional manager, unless of course the institution finds itself failing.
Similarly, it is the board's prime responsibility to oversee the actions of management and to ensure that a corporate culture of high integrity prevails. While the CEO and his management team may often feel the drive to build profits somewhat overshadows other priorities, it is for the board to provide a check on this and ensure there is balance to both secure an ethical culture, and to demonstrate to regulators and investors alike that a such a culture prevails.
In exceptionally complex institutions that have long records of experiencing that "stuff happens", the argument for a strong board of directors that is seen to be accountable to shareholders and whose actions are both transparent and effective, is vital. This level of authority and yes, independence relative to management, is not possible in such complex giant institutions without a clear divide between the CEO and the board's chairman. Each has a distinct role and accountability to employees, shareholders and regulators.
Dividing the roles is, of course, not enough. Boards of directors of the world's biggest banks need to be composed of individuals who have substantial experience of managing large and complex institutions, they should devote considerable amounts of time to their board responsibilities, and they should be highly active in their work. Unfortunately, this is not the case today in the boards of many of the biggest banks, where the CEO, even if he does not hold the Chairman title, dominates the institution, the agenda of the board and often influences the selection of new board members, so undermining the crucial goal of a strong and independent board.
Frank Vogl, has spent more than two decades involved in global banking policy issues.