THE BLOG
05/23/2013 08:47 am ET Updated Jul 23, 2013

Upset that Jamie Dimon Won? Think Again About the Separation of Powers

Jamie Dimon will retain his chairmanship title of JPMorgan Chase, after a vote from shareholders on Tuesday. Although Dimon scored big, his narrow win indicates that his support is limited.

Proxy advisory firms claim that the "London Whale" derivatives trades, which cost the bank $6.2 billion last year, was proof that the board had failed in its oversight of JP Morgan executives.

Dimon's win was a disappointment for some 30% of the shareholders who voted to split his role as CEO and Chairman. Shareholder activists argue that the role of Chief Executive and Chairman should be separated, since the board of directors is supposed to watch over the CEO. If they are the same person, then the checks and balances are misaligned.

Despite this convincing philosophical argument, the reality is much more complicated. A recent study from the University of Minnesota reports that firms actually perform worse after being forced to divide the role of Chairman and CEO.

Although separation of duties makes sense for small firms since communication within the leadership is simple, division of Chairman and CEO creates problems for large companies.

A good CEO possesses an endless amount of detail about the company and can efficiently make choices. In a large and complex company, the chairman cannot know as much as the CEO. Forcing the CEO to require the approval of the chairman for every decision may result in a bureaucratic mess.

The solution to corporate governance is much more nuanced than what activist shareholders think. In the long run, taking away Dimon's title as chairman may have been counterproductive. Still the most popular executive in the banking industry, Dimon is here to stay.

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