PI Original Ashlee Rezin Thursday February 21st, 2013, 5:27pm

AFSCME Joins Shareholder Coalition Calling For Independent Chairperson At JP Morgan Chase

Saying it “weakens a corporation’s governance” and can “harm shareholder value,” overseers of government worker pension funds have alleged that one person sharing the role of chief executive officer (CEO) and chairman of the board at JPMorgan Chase is a conflict of interest.

Saying it “weakens a corporation’s governance” and can “harm shareholder value,” overseers of government worker pension funds have alleged that one person sharing the role of chief executive officer (CEO) and chairman of the board at JPMorgan Chase is a conflict of interest.

James Dimon became CEO and president of JP Morgan Chase and Co. in 2005, and was named chairman of the board in 2006.

A coalition of investors, including the American Federation of State, County and Municipal Employees (AFSCME) Pension Plan, the Connecticut Retirement Plans and Trust Funds, Hermes Equity Ownership Services and the NYC Pension Funds, has filed a shareowner proposal calling on JP Morgan Chase to name an independent board chairman. Collectively the coalition has $820 million in JP Morgan shares.

JP Morgan Chase shareowners will vote on the proposal at the company’s 2013 annual meeting in May.

The coalition cites more than $6 billion in losses last year from bad derivatives trades, known as the London Whale, and “mounting investor concerns with the board’s oversight” as cause for the proposal. The group said in a statement, “a clear conflict of interest exists when a company’s board of directors, which is responsible for overseeing the company’s CEO, is chaired by the CEO. “

The group also cited cease-and-desist orders JP Morgan received from the Federal Reserve and the Office of the Comptroller of the Currency last month that require it to tighten its oversight, which Dimon oversees, in connection with trading and money laundering.

“In our view, shareholder value is enhanced by an independent board chair who can provide a balance of power between the CEO and the board, and support strong board leadership,” reads the proposal. “The primary duty of a board of directors is to oversee the management of a company on behalf of its shareholders. We believe that a CEO who also serves as chair operates under a conflict of interest that can result in excessive management influence on the board and weaken the board’s oversight of management.”

The proposal requests that the board of directors adopt a policy, and amend the bylaws as necessary, to require the chair to be an independent member of the board.

“With JP Morgan you’re talking about one of the largest financial institutions in the country with the largest derivatives exposure,” said John Keenan, corporate governance analyst for AFSCME, a labor union boasting 1.6 million members. “We saw a lapse in risk management last year with the Whale fiasco, and separating these two positions would allow Jamie Dimon to concentrate on running the company and the chairman to concentrate on running the board.”

“Separation provides a clear delineation and provides a system of checks and balances that is not present when both positions are held by one person,” he said. “Going forward, separation of those two roles and setting up a system of risk management is in the best interest of the shareholders.”

AFSCME filed a similar proposal last year that won 40 percent support from JPMorgan shareholders.

JP Morgan spokesman Mark Kornblau declined to comment.

In response to last year’s proposal, JP Morgan Chase issued a proxy statement saying, “the most effective leadership model for the firm currently is that Mr. Dimon serves as both chairman and chief executive officer.” JP Morgan argues that becuase other board directors are independent, Dimon can effectively serve both roles without a conflict of interest.

“The board believes it is functioning effectively under its current structure, and that the current structure provides appropriate oversight protections,” the proxy statement reads. “The board does not believe that introducing a separate chairman at this time and with this CEO would provide appreciably better direction for and performance of the firm, and instead could cause uncertainty, confusion and inefficiency in board and management function and relations.”

At least one expert said a lack of independence between management and the board of directors is common, both in American and European companies.

“To really critically examine the workings of company takes a huge amount of time, knowledge and expertise and that’s in short supply, so having the same person do both roles, but then having some additional people on the board of directors perhaps to ensure independence, is not uncommon,” said Bob Chirinko, head of the finance department at the University of Illinois at Chicago.

Chirinko said Dimon has “clearly been an instrumental force in the profitability of (JP Morgan Chase)” and “obviously knows a huge amount [about] the operations of the company and can offer intelligent decisions.”

“But having an independent board is a good thing for shareholders,” he added. “The purpose of the board is to monitor the management and that sense of independence can be broken when you have those two positions held by the same person.”

“If the chair and CEO is the same person, it doesn’t mean that some of the other folks on the board won’t ask the appropriate questions, so its not necessarily a problem, but it’s certainly moving in the wrong direction.”

AFSCME released a statement earlier this month indicating it has filed similar proposals calling for independent chairs to be named at companies including General Electric, Johnson & Johnson, Lockheed Martin, Target and Wal-Mart.

Leon Kamhi, executive director for Hermes Equity Ownership Services, an organization that aims to ensure shares are used to promote good management practice and sustainable investment, said in a statement, “Combining the roles of chairman and CEO not only confuses the responsibilities, but it overly concentrates power in one individual, creating oversight and accountability problems.”

“We believe this is a core principle for good corporate governance.”

Image: AP Photo/Frank Franklin II


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