Friday, May 10, 2013

What Will Dimon Do?

WWJD. Not what would Jamie Dimon do? But what will Jamie do?

Waiting Anxiously for the Shareholder Vote
In a matter of days, JPMorgan Chase shareholders will find out the results of a crucial vote to determine whether Chairman and CEO Jamie Dimon should relinquish  his role as Chairman of the bank holding company. In a similar vote last year, 40% of shares outstanding voted for him to give up the role as Chairman.  A year later, Dimon and JPMorgan have had to digest continual impact from the billions in trading losses in the infamous "London Whale" credit-derivatives debacle. They have endured stiff criticism from regulators for how JPMorgan managed those losses and for how regulators perceived the bank was behaving in response to inquiries.

Dimon has already been penalized for "Whale" mistakes when his 2012 bonus was reduced, even as JPMorgan continued to generate extraordinary earnings last year and in 2013's first quarter. His inner circle of senior managers (operating committee members) has changed faces substantially with some departing, some nudged out, and others promoted.

(JPMorgan reported record income of $21 billion in 2012--good enough for a 15% return on equity. It earned $6.5 billion in the first quarter, 2013. By year-end 2012, the bank reported assets exceeding $2.3 trillion supported by an equity base of over $200 billion.)

Some shareholders, who have large stakes and have stepped into activist roles, want to make sure such trading losses or astounding surprises in mismanagement will never occur again. They want to reorganize board membership, juggle risk-management oversight, and put more checks in the checks-and-balances of Dimon's power over the organization.  In effect, some contend that JPMorgan-related mishaps might not have occurred if Dimon had a chairman peeking over his shoulder.

As the vote counting winds down, the question for the moment is not what should Dimon do or what would he do.  The question? What will he do if the role of Chairman is seized from him?

His storied banking resume' indicates he doesn't like playing second-fiddle. He's comfortable biding a little bit of time as he awaits a top spot, but he fidgets and fumes if the wait is prolonged. Moreover, certainly he wouldn't want to give up power, authority and influence he has had for eight years or more.

Since he has been JPMorgan's head, he has not had a formal second in command, a president waiting in a green room for him to retire.  When JPMorgan purchased Bank One ten years ago, where he had been Chairman and CEO, he agreed to be President and CEO-in-waiting.  Typical of Dimon, he itched to assume full control of the bank sooner than he was supposed to. From the moment he arrived in New York from Chicago, he aggressively pushed his agenda of expense-control and balance-sheet strengthening, while then-CEO Bill Harrison was still in office.  Back then, Dimon urged the board to make him Chairman and CEO months ahead of schedule. That was no surprise.

Before JPMorgan and Bank One, Dimon had made his mark at Citigroup. As Sandy Weill's long-time protege' when the two of them built a financial-services behemoth during the 1990s, Dimon, over time, agitated his boss, even undermined him. Eventually a power struggle and some fiery situations caused Weill to fire his favorite deputy. Dimon might have been the CEO of Citi today (and Citi might be a much different organization), if he were willing to play fair and square with Weill.  Weill had the last word, and Dimon went on to make financial history elsewhere.

What will Jamie do if he's no longer chairman of JPMorgan?

Will he remain as CEO and proceed to manage the bank in the way he has since the financial crisis--expanding in all areas, controlling costs and operations, restructuring the mortgage businesses, and hustling to keep a trillion-dollar bank under control? Will he be willing to subject his strategy, actions, and every managerial move to the second guessing of a non-executive chairman--especially when Dimon hasn't been accustomed to such in the past decade?

Or will he agree to finish out the year or two as CEO and opt to retire sooner than he expected? Will he cooperate, manage the global business, and assist in selecting a CEO successor and grooming him or her? Will he cooperate, too, if only to ensure his own shareholder stake in the bank (over hundreds of millions in ownership) is not jeopardized?

Amidst this debate of corporate governance, many have taken sides. Some have pointed to studies that show the impact of separating the two roles.  Many of the studies indicate little, if any, favorable impact on a company's revenue or earnings growth or stock price when the roles are separated.

Jeff Sonnenfeld, a senior associate dean at Yale's School of Management, a Consortium school, in The New York Times this week called the shareholder vote at JPMorgan a "Jamie Dimon Witch Hunt" and reminded readers that some of the most scandalous companies in the last century, including Enron and Worldcom, had separate Chairmen and CEOs.

Other experts point out the decision to separate should not be determined by previous studies, but by the particular challenge or issue that confronts the company. Case by case, they say. In the case of JPMorgan, the challenges are to (a) manage the complex risks and operations of a financial institution almost too big to fail, (b) respond to, report, and manage the escalating requirements of regulators, and (c) meanwhile, continue to grow revenues, earnings and a stock price that seems to have trouble eclipsing the $50/share threshold. Some of the proponents in the shareholder vote think JPMorgan can overcome these kinds of challenges with two people in charge.

But what happens to JPMorgan and its ability to confront these issues if one of the two is not Dimon? Is Dimon about to bolt out the door?

Here are a couple of scenarios.

1.  Shareholders vote to keep Dimon as Chairman, but the vote is close, say 51%-49%.  Dimon, therefore, won't linger or care how close it was. With a short memory, he will proceed along his recent course--cooperating with regulators, gearing up for Dodd-Frank and Basel III, reshaping his inner circle, and driving his bank leaders crazy, pushing them to increase revenues, manage all risks imaginable, and control costs.

Several recent scoldings from regulators and all the attention in the press about confrontations with lawmakers and regulatory bodies will keep Dimon focused on issues of risk, regulation and compliance.  The bank is re-engineering its organization from front to back to ensure compliance and help comfort outsiders to show Dimon has things under control in the way it seemed he didn't--momentarily--during the "Whale" crisis.

Events of the past year will encourage him to be more forthcoming with the public about his intentions for succession.  He might even quietly support the effort that his successors be a separate Chairman and CEO. In recent months, with the shuffling among those in the inner circle and by appointing people into the roles of COO, he has offered clues. But in the past, he offered hints of who were the designated favorites one year, yet changed the slate quickly a year or two later.

2.  Shareholders vote to take away Dimon's Chairman title, but permit him to remain as CEO as long as he wishes. Dimon will be wounded. However, he would be a professional, uttering the right remarks about his support for the new structure. He would also likely regroup and contemplate next steps. He would not be comfortable taking directions regarding strategy and the deployment of capital from a part-time Chairman, especially if he feels confident his sole leadership is the best course.

As an experienced professional and an investor who will not want boardroom turmoil to inflict unnecessary volatility in the stock price, Dimon won't pout and play spoilsport. However, the thrill and energy of running JPMorgan won't be the same. The power he wielded within the organization may not be the same, because the buck won't any longer stop with him.

He would likely plan a retirement over the period of a year or two. Following the footsteps of former CEOs, like GE's Jack Welch, known for being accomplished, premier business managers, Dimon will review his achievements, reflect on them, and will likely want to write about them (or teach them to a business-school finance class). He won't sit still and will pursue something bold. He'll want to advise future bank leaders on what went right, what worked, how it all worked, and what went wrong.

And it's likely then he'll insert the last word to say that separating the roles of Chairman and CEO at JPMorgan might have been something, in his case, that didn't work as well as the status quo.

Tracy Williams

See also:

CFN: JPMorgan and Its Trading Losses, 2012
CFN: Jamie Dimon on Regulation, 2012
CFN:  Jamie Dimon's Message to Shareholders, 2011

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