Published May 16, 2013
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 year.
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, it said.
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.