Case study chapter 10 Cengage Placeholder

case study chapter 10 Cengage PlaceholderMini-Case The Imperial CEO, JPMorgan Chase’s Jamie Dimon
Jamie Dimon, CEO of JPMorgan Chase & Co., is one of the very few top executives at large banks or major financial services firms who was unscathed by the substantial economic recession which began in 2008—a recession largely caused by those firms taking inappropriate risks. He is described as charismatic and an excellent leader. Yet, in 2012, JPMorgan Chase experienced its own scandal caused by exceptional risk taking. Traders in its London operations were allowed to build a huge exposure in credit derivatives that breached the acceptable risk limits of most analytical models. As a result, the bank suffered losses of more than $6 billion. It is referred to as the London Whale trading debacle. In 2013 and 2014, there were large regulatory and legal settlements. Most significant was a $13 billion settlement with regulators over mortgage bond sales in 2013. In addition, to this record settlement, “the bank paid $2.6 billion to resolve allegations that it didn’t stop Bernie Madoff’s Ponzi scheme and two fines of about $1 billion each stemming from currency rate manipulation and the London Whale trading loss.” It may need an additional $20 billion in additional capital to satisfy regulatory bank safety rules. One Democratic Senator from Delaware, Ted Kaufman, noted: “I think Jamie Dimon is Teflon-coated.”
Executives and board members of JPMorgan Chase worked hard to thwart these efforts. Lee Raymond, the former CEO of ExxonMobil who has been on the JPMorgan board for 28 years, played a key role in these efforts to support Dimon and avoid a negative vote. This group lobbied major institutional shareholders and even asked (though he declined) former U.S. President Bill Clinton to help work out a compromise with the AFSCME. They even suggested that Dimon would quit if he had to give up one of the roles and it would harm the stock price. In the end, Dimon and the bank won the vote with a two-thirds majority for Dimon to retain both positions.
Several analysts decried the vote and suggested that having a third of the shareholders vote against Dimon is not a major vote of confidence. One even suggested that the vote is not surprising because of the 10 largest institutional owners of the bank’s stock, seven have CEOs who also hold the chair position. So, how could they openly argue that this is bad for JPMorgan when they do it in their organizations? Furthermore, these major institutional investors want the banks to engage in high-risk activities with the potential to produce high returns. This is especially true because the downside risk of losses is low as the government cannot afford to allow the big banks to fail.
One analyst suggested that the shareholders voted out of fear (potential loss of Dimon) and for personality instead of good corporate governance. Analysts for the Financial Times argued that the outcome of this vote demonstrates how weak shareholder rights are in the United States. Finally, another analyst noted that while splitting the CEO and chair positions does not guarantee good governance, it is a prerequisite for it. Lee Raymond suggested that the board would take action. Several speculate that such actions will not relate to Dimon duel positions, but rather to a reconfiguration of the board members on the risk and audit committees. Some have argued that certain members of these committees have little knowledge of their function and/or have financial ties to the bank, thereby creating a potential conflict of interest. One protection for Dimon is that the JPMorgan Chase continues to perform well, even with poor ratings from governance evaluators.
Sources: E. Bloxham, 2015, J.P. Morgan: Taking on more risk than it can handle?. Fortune, www.fortune.com, May 14; S. Gandel, 2015, After complaining about regulations, JPMorgan Chase beats estimates—again. Fortune, www.fortune.com, April 29; E. Glazer, 2014, J.P. Morgan’s decade of Dimon, Wall Street Journal, June 30, C1; J. Eisinger, 2013, Flawed system suits the shareholders just fine, New York Times DealBook, http://dealbook.nytimes.com, May 29; J. Plender, 2013, The divine right of the imperial CEO, Financial Times, www.ft.com, May 26; J. Sommer, 2013, The CEO triumphant (at least at Apple and Chase), New York Times, www.nytimes.com, May 25; H. Moore, 2013, JP Morgan CEO Jamie Dimon remains the Indiana Jones of corporate America, The Guardian, www.guardian.com, May 21; J. Silver-Greenberg & S. Craig, 2013, Strong lobbying helps Dimon thwart a shareholder challenge, New York Times DealBook, http://dealbook.nytimes.com, May 21; D. Fitzpatrick, J. S. Lublin, & J. Steinberg, 2013, Vote strengthens Dimon’s grip, Wall Street Journal, www.wsj.com, May 21; A. T. Crane & A. Currie, 2013, Dimon’s Pyrrhic victory, New York Times DealBook, http://dealbook.nytimes.com, May 21; D. Benoit, 2013, J.P. Morgan’s powerful board members, Wall Street Journal, www.wsj.com, May 20; M. Egan, 2013, Top J.P. Morgan directors back Dimon as CEO, Chair, Fox Business, www.foxbusiness.com, May 10.
Case Discussion Questions
How well do you think the governance system of JPMorgan Chase is working in protecting shareholder interests?
What particular governance devices are helping or hindering good governance in the JPMorgan Chase situation?
What do you recommend to improve the governance system specifically for JPMorgan Chase but also overall relative to the system of governance devices described in Chapter 10?

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