By Nadia Damouni, David Henry and Ross Kerber
May 16 For years, JPMorgan Chase & Co
Chairman and CEO Jamie Dimon and other executives have
hand-picked new directors, in a practice that is now unusual for
a major U.S. bank.
The JPMorgan board's governance committee, responsible for
hiring new members, relies almost entirely on referrals from
management to find director nominees, according to two sources
familiar with the bank's practices and a review of bank
regulatory filings. All of the other 10 largest U.S. banks say
they use executive search firms, which have knowledge of a range
of possible candidates.
An examination of the bank's selection process, which until
now has been little known, could prompt questions about how much
influence Dimon has over the largest U.S. bank's board. It comes
ahead of a critical shareholder vote next Tuesday over whether
the board should strip him of the chairman's title and give it
to another director, which would increase oversight of Dimon's
stewardship as CEO.
Selecting directors in this way can create the appearance
that the board may be too close to Dimon and his senior
management team, some corporate governance experts said.
"There is value in seeking input from others outside of the
board room," said Ann Yerger, executive director at the Council
of Institutional Investors, an association of pension funds,
endowments and foundations. "The point here is you should be
casting a wide net, especially at our most elite companies."
JPMorgan spokeswoman Kristin Lemkau said on Wednesday that
the board has used executive search firms but has not found them
useful. "Many of the director candidates for our board are names
already well known to the business community," she said.
For example, Lemkau said, James Bell, who joined the board
in November 2011 shortly before retiring as Boeing Co's
chief financial officer, was known to the governance committee
as a highly qualified director prospect for a number of years.
By most corporate standards, JPMorgan's 11-member board is
strong - with a lot of business heavyweights - and is relatively
independent. Ten directors are described by the bank in
regulatory filings as independent from management, and Dimon is
the only executive on the board. Former ExxonMobil CEO
Lee Raymond is the lead independent director.
A former JPMorgan executive who has made presentations to
the board said that Raymond acts as an effective counterweight
to Dimon. Some shareholders agree.
"I don't think these guys are shrinking violets," said
Jordan Posner, managing director of Matrix Asset Advisors Inc, a
New York money manager with about 619,000 JPMorgan shares,
referring to Raymond and other directors. Matrix is voting in
favor of keeping Dimon in both roles.
JPMorgan said that Raymond did not want to be interviewed
for this article.
But no director other than Dimon has significant banking
industry experience - a shortcoming that started to gnaw at some
investors last year when JPMorgan suffered a $6 billion loss
from failed derivative positions that came to be known as the
"London Whale" trades. Since then Dimon has had a series of
high-profile dust-ups with regulators, which have further added
to shareholder discomfort.
"This board doesn't have the bench, the expertise, the
supporting cast," said Michael Pryce-Jones, an analyst at CtW
Investment Group, which, as an adviser to union pension funds
owning about 6 million JPMorgan shares, is pushing for changes
to the bank's board.
Still, many investors say they do not want Dimon to leave as
CEO of the firm he has profitably run for more than seven years.
Dimon has suggested that he might quit if shareholders at the
Tampa, Florida meeting vote to ask the board to strip him of the
chairmanship. A similar measure won 40 percent support last
An executive at an institutional investor with several
million shares in JPMorgan said it is looking beyond the trading
loss to broader questions around governance as it decides how to
vote on the proposal. Last year the investor supported Dimon.
Proxy adviser Institutional Shareholder Services has
recommended voters support the split. ISS said when it asked
Raymond whether board members on the risk management committee
had enough expertise, he said that it was hard to find qualified
people who had no conflicts.
At other banks, the board selection process is different.
In the aftermath of the financial crisis, Citigroup Inc
added eight directors with skills including regulatory and
risk management expertise, ISS said. Bank of America Corp
added five directors, including a former governor of the
U.S. Federal Reserve and a former CEO of a bank holding company,
Both Citigroup and Bank of America use search firms. Of the
10 largest U.S. banks, only JPMorgan and Bank of New York Mellon
Corp make no mention of using outside search firms to
find directors, a review of filings shows.
BNY Mellon spokesman Ron Gruendl said that the trust bank
uses a variety of ways to recruit directors, including working
with outside search firms.
At the time of the London Whale losses, the three directors
on the risk committee were: James Crown, president of a large
family investment company; David Cote, the CEO of Honeywell
International Inc ; and Ellen Futter, who heads the
American Museum of Natural History in New York. The three, who
remain on the committee which has now been augmented by a fourth
member, were not available for comment.
ISS found the experience of the original three members
wanting. It said plenty of directors with strong backgrounds in
risk management, financial regulation and other relevant areas
serve on rival financial companies' boards.
Last week, JPMorgan directors Raymond and William Weldon,
who is a former CEO of Johnson & Johnson, vouched for
the qualifications, diligence and independence of board members
in a letter to shareholders.
They pointed out that the board had cut Dimon's pay in half
for 2012 because of the London Whale problem, and ensured the
employees responsible for the losses paid back $100 million to
the bank and were fired. They described the board as "highly
functioning, engaged and empowered."
In their letter, Raymond and Weldon said those three members
of the risk panel could not have anticipated that the company's
hedging strategy would turn into a far riskier trade.