Dispute at JPMorgan Grows, for All the Wrong Reasons

The fight over whether to split the jobs of chief executive and chairman at JPMorgan Chase is a silly one. That’s not just because it’s a lot of drama over something so unimportant in the scheme of things, but because it has turned into a backdoor referendum on one man, Jamie Dimon.

Here’s how small the actual dispute is.

Shareholders are being asked by the Afscme Employees Pension Plan and a number of other shareholders, including the New York City comptroller’s office, to vote on a resolution recommending that the JPMorgan board require that the chairman and chief executive positions be separated. Mr. Dimon holds both positions, so if the proposal were approved, a new independent chairman would be appointed, presumably from one of the current board members.

But let’s be clear, the vote is advisory only. The JPMorgan board, which opposes this move, could still say no. And even if the board changes its mind, Mr. Dimon would still be chief executive and very much in charge, assuming, of course, that he stays.

The chairman, whether at JPMorgan or any other company, really has the power only to call board meetings and preside over them. The chairman would just be one person on the 11-member board.

So why even go through with this?

Well, Afscme and the proponents of the change argue that “shareholder value is enhanced by an independent board chair who can provide a balance of power between the C.E.O. and the board.”

These shareholders are right to some extent. A number of studies have found that in the wake of separating the two positions, companies do increase in value. These findings are consistent with other studies that show that having a more independent board increases risk monitoring.

The idea is that a separate chairman gives voice to the board by having someone who can stand up to the chief executive. Based on these studies, more and more companies are separating these positions, pushed by institutional shareholders and Institutional Shareholder Services, the influential proxy advisory service.

But the problem with this campaign is that not all companies are alike. For many companies, separating the chief executive and chairman roles may not be a good thing. As you might suspect, it depends on the type of company and the board’s composition, among other things. (For an example of the separation of the chief executive and chairman roles where it didn’t seem to amount to much, consider Hewlett-Packard, where the board still allowed the company to pursue the disastrous Autonomy acquisition.)

Again, there are studies to support the counterargument. On boards where there is already a strong independent director presence, it is unclear what adding an additional voice will do. It also may be that where the issues are more than just standing up to the chief executive, a separate chairman will not do much. At least one study has found that in more complex companies like JPMorgan, where it is harder to monitor the chief executive, separating the two roles has had less effect. And no study to my knowledge has ever found that companies that do such a split are better at risk management.

This is important in the case of JPMorgan, because some have argued that the move is justified in this case for risk management purposes. Included in this group are the funds proposing this resolution, stating that “we believe that independent board leadership would be particularly constructive at JPM,” and that the firm’s $6 billion trading loss last year had “tainted Mr. Dimon’s reputation.”

But does anyone really think that the JPMorgan board sits with complex spreadsheets looking at the bank’s risk positions? Does anyone think it should?

Instead, the boards of sophisticated banks control risk by picking the right management. Up until the multibillion-dollar trading blowup last year, Mr. Dimon had a stellar record on risk management. Would an independent chairman really have prevented such a trading debacle?

People make mistakes, and whether having yet another voice supervising risk would make a difference is uncertain. With JPMorgan, an independent chairman is probably not going to bolster risk management in any meaningful way.

For one, the bank already faces fairly constant scrutiny from the media and from Wall Street. Having an independent chairman is more useful for those companies that operate outside the spotlight. And JPMorgan already has a qualified independent lead director â€" Lee Raymond, the former chief executive and chairman of ExxonMobil.

Given what can be realistically expected from separating the chairman and chief executive positions, this shareholder vote appears to be more about the uneasiness people feel about big banks. At its heart, the dispute is about how JPMorgan appears to have taken over the role of Wall Street stage villain from Goldman Sachs. When people criticize banks for being too big to fail, JPMorgan is now the bank that is cited.

The reason for this is frankly Mr. Dimon, who has a public relations problem. By vocally and aggressively criticizing regulatory reform, he has made his bank a target. It didn’t help that Mr. Dimon initially dismissed the London Whale trading loss as a “tempest in a teapot.”

Still, he is a brilliant chief executive who has served JPMorgan shareholders quite well by steering the bank successfully through the financial crisis. They should be quite happy with him even after the trading debacle. JPMorgan has also moved aggressively to show that it has learned from the experience and enhanced its risk management systems. Mr. Dimon has called the episode “the stupidest and most embarrassing situation,” and his 2012 compensation was cut by more than half, to $11.5 million from $23 million.

So, if the vote is not about splitting the positions of chief executive and chairman, but about sending a message to Mr. Dimon, shareholders may want to keep in mind what has been said already.

And if this is really about the belief that banks are too big, separating the two jobs is not likely to accomplish anything on that front. Indeed, in today’s complex world, it may be a pipe dream to think that banks can be simplified and just made smaller. But that is whole different debate.

The shareholder vote that will be announced on May 21 is about the merits of a corporate governance change to JPMorgan and its likely effect. It should not be about “sending a message” to Mr. Dimon or the big banks. If that is the goal, then shareholders should raise the issue directly and propose to break up JPMorgan or fire or even censure Mr. Dimon. But that would never get any significant votes. Instead, we are left with a silly fight over something that probably won’t make much difference anyway.