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January 02, 2015
New Controls for Old Risks at JPMorgan Chase
    by Robert Kropp

In response to shareowner pressure, the bank endorses the Shareholder-Director Exchange as a means of improving the quality of engagement between investors and board directors. Second of a two-part series.


The 2014 Proxy Resolutions and Voting Guide published by the Interfaith Center on Corporate Responsibility (ICCR) includes three shareowner resolutions filed by ICCR members that address the corporate governance performance of JPMorgan Chase. Two of those resolutions—requesting a report on the company's business standards, and the separation of the positions of Board Chair and Chief Executive Officer—were withdrawn following JPMorgan's agreement to produce a report explaining how internal controls have been strengthened to ensure that the institution no longer longer indulges in the ethical lapses that have resulted in increased regulatory and legal scrutiny.

“JPMorgan Chase is now embroiled in multiple scandals,” the request for a report on business standards read. “Eight federal agencies and multiple foreign governments are actively or recently investigated us. For example:
1. In August 2013, the U.S. government brought criminal charges against two former employees for their role in a risky bet on credit derivatives resulting in a $6 billion loss. The Bank settled with the SEC and other agencies for $920 million and was forced to admit blame.
2. In late July 2013, the Federal Energy Regulatory Commission (FERC) accused the company of manipulative bidding strategies in the California and Michigan electricity markets between September 2010 and November 2012. While neither admitting nor denying wrong doing, our company settled the issue with FERC for $410 million.
3. In a dramatic, unprecedented settlement related to mortgage loans and mortgage securities JPMorgan Chase is paying a $13 billion settlement, including $4 billion to mortgage customers originated by Countrywide. In addition, the bank publicly admitted responsibility rather than simply settling, while neither denying nor acknowledging guilt.
4. The bank spent $17.7 billion dollars on litigation-related expenses from 2008-2012 and set aside $23 billion as a reserve for future legal expenses.”

I thought it important to list each of the examples included in the resolution because JPMorgan recently published its report, entitled How We Do Business. Much of the report seeks to assure shareowners of the independence of the company's board of directors, the lead independent director of which is Lee Raymond, the former CEO of ExxonMobil. The prioritization of board independence is presumably highlighted in response to the withdrawal by ICCR members of the resolution calling for the separation of the positions of Board Chair and CEO.

The report also highlights the company's endorsement of the Shareholder-Director Exchange (SDX), an initiative that seeks to improve the quality of engagement between shareowners and board directors. While corporate management usually leads on investor relations, corporate boards have significant influence on governance issues of concern to shareowners, and SDX provides a protocol for dialogue in which the input of management is reduced.

In its report, JPMorgan contends that improved engagement has led it to add two directors with risk management and financial services experience to its board; the company also states that it has taken steps to codify the independence of board leadership.

"It's not the be-all and end-all of everything, but it's a way to have better accountability and transparency going forward," Rev. Seamus Finn of ICCR told American Banker.

The reader will note that the examples provided in the withdrawn business standards resolution are of recent vintage. Yet, despite having paid more than $20 billion in fines—and after having laid off some 7,500 employees—the company's purportedly independent board, with Raymond as lead director, rewarded Chairman and CEO Jamie Dimon with a 74% increase in pay, to more than $20 million.

My modest assessment? JPMorgan's report is likely to please shareowners more than those who still suffer from the bank's role in the 2008 cratering of the global economy. The gains for shareowners, particularly relating to improved access, are evident. But the degree to which such gains contribute to safeguards against the company's still-recent ethical violations remains to be seen.

One corporate governance resolution filed by ICCR members remains on the table for JPMorgan Chase. The resolution requests that the company report on its lobbying expenditures, which total in the millions every year and about which it discloses little, especially relating to payments to such politically active trade associations as the US Chamber of Commerce.

Such disclosures have taken on added importance in the light of news stories about the recently passed federal budget. The budget contains a provision, written by Wall Street lobbyists, that eliminates a Dodd-Frank safeguard against banks trading in risky derivatives using taxpayer-insured funds. In other words, the provision permits banks to return to the same activity that brought the global economy to its knees in 2008.

Former House Financial Services Committee Chairman Barney Frank called the provision “a frightening precedent that provides a road map for further attacks on our protection against financial instability.”

According to The Washington Post, “Jamie Dimon himself telephoned individual lawmakers to urge them to vote for it, according to a person familiar with the effort.”

Sr. Nora Nash of ICCR said, “We are particularly concerned with corporate spending that seeks to undermine regulation requiring stricter oversight and which may occur directly or indirectly through trade association memberships. The news last week on Dodd Frank rollbacks regarding derivatives trading gives JPMC’s response to this request even greater relevancy.”

 

 
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