Inside Financial Services

Enough With the Proxy Advisor Kabuki

Splitting the CEO's and chairman's roles at JPM is a nutty idea. Why does anyone listen to governance "experts'?

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I can’t think of a better example of what a shakedown operation the proxy advisory business has become than the sanctimonious nonsense lately emerging from firms like ISS and Glass Lewis over whether JPMorgan Chase should separate the chairman’s position the CEO’s. I mean, really, fellows. This isn’t hard:

Fact: Jamie Dimon steered JPMorgan Chase through the most catastrophic financial crisis of our lifetimes-a crisis that ended the careers of more than a few of his peers, by the way, and caused the collapse of several Morgan competitors-as ably as any big-bank CEO and much more ably than most. Under Jamie, JPMorgan Chase consciously avoided the excesses that contributed to the bubble, and emerged from the resulting turmoil stronger than ever. For this he deserves to be demoted?

Fact: The “London Whale” losses that have Jamie’s critics’ howling were immaterial to JPMorgan in the grand scheme of things. Sorry, but it’s true: even with the loss, Morgan earned $28 billion pretax last year, a record. The company ended the year with $204 billion of shareholders equity. The only reason the bank had to disclose the loss in the first place is that Jamie (to his everlasting regret, I’m sure) had earlier described the controversy as a “tempest in a teapot.” It turned out to be a bit more than that, and the bank had no choice but to say so. Still, immaterial.

Fact: There’s zero evidence that splitting the chairman’s role from the CEO’s does anything to improve corporate governance or the creation of shareholder value. Jeffrey Sonnenfeld ably pointed this out on Wednesday in an op-ed in the New York Times. I won’t summarize his entire piece here (it’s definitely worth reading, though) and will merely mention that Sonnenfeld points out that Enron and WorldCom both had separate chairmen and CEOs, just the way ISS and Glass Lewis recommend. How did that work out? Further, fully half of Fortune’s list of “most admired companies” don’t bother splitting the titles, either.

So there’s no evidence that there’s a governance problem at Morgan in the first place and, even if there were, splitting chairman from the CEO wouldn’t do anything to fix it. The only practical effect of shareholders taking ISS’s and Glass Lewis’s advice, then, would be to increase the marginal propensity of Jamie to take a call from a recruiter. How that would benefit shareholders is beyond me.

In the meantime, as I say, it’s hard not to come to the conclusion that this whole “proxy advisory” business is anything but a scam, and the advisors themselves anything but parasites. By the nature of their jobs, investment managers are supposed to be independent thinkers. I can’t imagine an area of the business where independent thinking is more vital than how a manager carries out his role as a fiduciary. It is the sort of thing that simply shouldn’t be outsourced by any manager who takes his job seriously. But too many managers unfortunately do outsource it, to these self-appointed, highly paid governance “experts” with their idiotic “best-practices” checklists that have little to do with the real world, and their dumb recommendations that can often weaken a company rather than strengthen it. It’s a bunch of kabuki nonsense that costs companies, costs shareholders, and doesn’t do anybody any good but the holier-than-thou advisors themselves. There are better ways to spend money. Investors should read the proxies themselves-that’s what I do-and then vote like owners, since that’s exactly what they are.

What do you think? Let me know!

10 Responses to “Enough With the Proxy Advisor Kabuki”

  1. slim

    Bravo Tom

    If one doesn’t understand the company and its issues well enough to vote one’s shares without relying on outside advice, one shouldn’t own the shares. This goes double for investment managers. The proxy advisory business should not exist, and that it does is a huge black mark on the investment managment business.

  2. Mark Smedley

    Couldn’t agree more, thanks for your unvarnished perspecitve.

  3. ED

    Absolutely. Jamie Diamond is the best. Why in the world would I want to handcuff him? The London Whale resulted in a large loss. Last time I checked banks are in the business of risk taking. We lost that one. In the words of Barry Diller many years ago “They won, we lost. NEXT”

  4. Paul Krusa

    The real question is not whether to split the chairman/CEO roles but rather whether to re-elect some of the directors on the risk and audit committees. That question is considerably more substantive and not as clear-cut. Having watched those (similar) directors over the years I can tell you there are often a lot of empty suits.

  5. JD

    Thank you for calling it like it is. The only ones benefitting from proxy advisory services are the executives, who somehow over the past decade, have convinced folks they provide a useful service. Talk about a great scam – getting paid to provide corporate oversight with no accountability.

  6. barrydemo

    My grad school Prof went thru the Depression and his favorite line was, ” do your homework and read about your investments to make your own decision”

    Problem is, people don’t want to do the work 🙁

  7. Stu Feiner

    As Intel former chair Andrew Grove stated: “The separation of the two jobs goes to the heart of the conception of a corporation. Is a company a sandbox for the CEO, or is the CEO an employee? If he’s an employee, he needs a boss, and that boss is the board. The chairman runs the board. How can the CEO be his own boss?”

  8. Fred the Shred

    It’s good corporate governance to have a nonexecutive chairman separate from the CEO. All UK plcs are organized that way, and it has kept UK plcs from ever doing anything stupid. The reason that Northern Rock, Lloyds and RBS came through the financial crisis unscathed is because they had nonexecutive chairmen separate from the CEO. Why, if Lehman and Bear Stearns had had nonexecutive chairmen separate from the CEO I’m sure, positively certain that they’d still be with us today. Lehman and Bear didn’t fail because of excessive leverage and stupid investments, they failed because they combined Chairman and CEO roles. Pretty obvious really. If you don’t understand why separating the roles is so important, Tom, then you just don’t get it.

  9. Fred the Shred

    It’s good corporate governance to have a nonexecutive chairman separate from the CEO. All UK plcs are organized that way, and it has kept UK plcs from ever doing anything stupid. The reason that Northern Rock, Lloyds and RBS came through the financial crisis unscathed is because they had nonexecutive chairmen separate from the CEO. Why, if Lehman and Bear Stearns had had nonexecutive chairmen separate from the CEO I’m sure, positively certain that they’d still be with us today. Lehman and Bear didn’t fail because of excessive leverage and stupid investments, they failed because they combined Chairman and CEO roles. Pretty obvious really. If you don’t understand why separating the roles is so important, Tom, then you just don’t get it.

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