JPMorgan Chase & Co shareholders should vote against the re-election of three board members because they failed to properly oversee risk-taking that led to $6.2 billion of losses on the so-called "London Whale" trades, an influential proxy advisory firm said.
ISS Proxy Advisory Services said in a report released late Friday that directors David Cote, James Crown and Ellen Flutter should not be re-elected at the company's annual meeting this month because of "material failures of stewardship and risk oversight."
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The firm also renewed its recommendation from a year ago that CEO and Chairman of the Board Jamie Dimon give up one of those two titles. ISS said investigations of the derivatives loss, which surfaced right before last year's shareholder meeting, showed that JPMorgan executives need more independent oversight and that the company is too big and too complex for one person to be able to do both jobs.
Shareholders will meet on May 21 in Tampa, Florida. They will vote on the re-election of the company's 11 directors and on a non-binding proposal from four institutional shareholders calling on the board to have a chairman who is independent from management. A similar advisory proposal failed to pass last year, receiving only 40 percent of the vote. That vote was five percentage points more than similar proposals at other companies that year.
The independent chair vote is developing into a major test for Dimon, 57. [ID:nL2N0CZ24C] It comes as criticism, and sanctions from regulators, over poor risk management have piled up since the "London Whale" losses surfaced at the bank, the biggest in the United States with $2.39 trillion in assets.
The trading debacle has picked up the same "London Whale" nickname that hedge funds gave to a JPMorgan trader for the outsized derivatives bets he placed for the company.
The ISS recommendations on the re-election of directors shows the shareholder debate over governance of the company is broadening beyond Dimon.
The three directors who ISS singled out for replacement were members of the board's risk policy committee in December 2010 when the committee was shown a presentation by management that highlighted large profits from trading strategies in the firm's Chief Investment Office, where the derivative losses later occurred.
The presentation said the CIO strategies had contributed $2.8 billion of "economic value" since inception, with an average annualized return of 100 percent, according to a report released earlier this year by the board on its review of the matter.
ISS said the large profits showed that the CIO had changed from a unit that hedged risks to "what was essentially a proprietary trading desk" and should have prompted the committee to act against the practice.
A statement from JPMorgan spokeswoman Kristin Lemkau on Saturday said: "The company strongly endorses the re-election of its current directors and disagrees with ISS's position."
The statement added: "While the company has acknowledged a number of mistakes relating to its losses in CIO, an independent review committee of the board determined that those mistakes were not attributable to the risk committee."
In its proxy statement for the coming meeting, the board said that the actions taken by the company after the "London Whale" debacle show it to be strong and independent.
After the loss, the board added a member to the risk policy committee - new director Timothy Flynn, a retired chairman of auditor KPMG International.
ISS, which researches proxy issues and makes voting recommendations to institutional investors, praised the company for putting Flynn on the panel and recommended that shareholders re-elect him as well as seven other directors.
Last year, ISS recommended that all director candidates nominated by the board be elected.
The advisory firm said the JPMorgan board needs "refreshment" and the panel should search "for seasoned directors with financial and risk expertise" to replace Cote, Crown and Futter.
Cote is chief executive and board chairman of technology and aerospace company Honeywell International Inc ; Crown is president of investment firm Henry Crown and Co, and Futter is president of the American Museum of Natural History.
The company's statement on Saturday also said: "The members of the board's risk committee have a diversity and breadth of experiences that have served the company well."
ISS said it had discussed the board's independence and the qualifications of the risk policy committee members with the board's presiding director, Lee Raymond, on April 26 before reaching its conclusions. Raymond is a former CEO and chairman of the board of Exxon Mobil Corp.
ISS criticized the board for deferring to management and said the panel "appears to have been largely reactive, making changes only when it was clear that it could no longer maintain the status quo."
(Reporting by David Henry in New York; editing by Gunna Dickson)