University of Waterloo The Imperial CEO JPMorgan Chases Jamie Dimon Discussion

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Read the Chapter 10 Mini-Case: The Imperial CEO, JPMorgan Chase's Jamie Dimon

Respond to question 1: How well do you think the governance system of JPMorgan Chase is working in protecting shareholder interests?

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Respond to question 3: 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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335 Chapter 10: Corporate Governance Mini-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.” Because of the huge loss and concerns about the lack of oversight that led to these fines and settlement, there was a move by shareholder activists to separate the CEO and chair of the board positions, requiring Dimon to hold only the CEO title. Playing key roles were the American Federation of State, County and Municipal Employees (AFSCME) and the Institutional Shareholder Services (ISS). The AFSCME was pushing to separate the holders of the CEO and chair positions at JPMorgan Chase. The ISS was pushing for shareholders to withhold the votes for three directors currently on the Morgan’s board policy committee. Dimon described the London Whale debacle as an anomaly caused by the inappropriate behavior of a few bad employees. However, this debacle plus the huge fines and settlements seems to suggest serious weaknesses in the bank’s oversight of activities involving significant risk and compliance with regulatory rules. 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 twothirds 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. Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. 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WCN 02-200-203 JP Morgan Chase is using the market for corporate control, which is an external governance mechanism that activates when a firm’s internal controls break down. Many analysts argued that shareholders would vote out of fear if the CEO would be replaced, and the stock would go down in value making the vote count for personality instead of good corporate governance. Several recommendations can improve the governance system. One suggestion is to have a better communication system between top management and lower management with decision-making and implementation. Another recommendation would be to implement governance mechanisms on ownership concentration and executive compensation. By having more concentrated ownership, it will produce more active and effective monitoring, which will in turn, force managers and board of directors to make decisions that best serve shareholders’ interest. Furthermore, through making the suggested changes and reviewing policies, this will help to understand better the inner workings and the role of the board along with what works concerning the governance system.
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Running Head: JPMORGAN CHASE

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JPMorgan Chase
Name:
Institution:
Date:

JPMORGAN CHASE

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Question 1
It is paramount that the system of governance at JP Morgan Chase is doing their best to
protect the interests of the shareholders. Apparently, the goal of the shareholders is to maximize
their wealth. This can only happen if the directors are set to work towards the goal of profit
maximization. The goal of every profit-making organization is to maximize the profits as they
minimize the losses. For this to happen, the management has to ensure that there is high
transparency in the high level of management. In JP Morgan, the shareholder activists call for
separation of the positions of the Chief Executive Officer and th...


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