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For Wall Street, it's not quite splitting time

by contributor Jane Searle | Published May 6, 2013 at 10:03 AM

Any move to strip JPMorgan Chase & Co. chief executive Jamie Dimon of his chairman role is unlikely to trigger similar action on Wall Street, but it has thrown fresh focus on the issue of succession at the largest U.S. bank.

Dimon faces growing pressure to give up his role as chairman at a shareholder meeting scheduled for later this month after a failure of risk controls saw the bank -- which has a market cap of $182 billion -- lose $6.2 billion on derivative trades.

Yet industry watchers say any split of the roles is unlikely to have wider ramifications after a similar vote at Wells Fargo & Co. was defeated in April.

Goldman, Sachs & Co. also avoided a shareholder vote on the issue after giving lead director James Schiro greater powers to set the board agenda, write directly to shareholders and hold meetings exclusively for outside directors.

Critics who advocate splitting the roles at JPMorgan include New York City Comptroller and mayoral candidate John Liu, whose office oversees the city's pension funds, and two major California pension funds -- the California Public Employees' Retirement System and the California State Teachers' Retirement System.

"Boards need to generate effective debate around operations, potential risks and proposed developments," CalPERS spokeswoman Amy Norris said. "This is best accomplished when the CEO and chair roles are separate."

The same proposal at JPMorgan last year drew 40% of votes in favor of splitting the leadership. The bank will need a nonbinding vote of more than 50% at its May 21 shareholder meeting if any action is likely.

The bank's board has said it "strongly endorses" keeping Dimon in both jobs, with JPMorgan posting a record $6.5 billion profit in the first quarter, up 33% from last year.

The risk that Dimon may leave early if stripped of the chairmanship has also renewed a focus on succession.

Evercore Partners Inc. head of bank research Andrew Marquardt said he was not concerned about Dimon's departure in response to such a move.

"Historically, JPMorgan has had a Dimon premium but that doesn't exist anymore and it's now the cheapest large-cap bank on forward estimates. I don't think it's a reason Dimon's time would be cut short," he said.

"Splitting the roles has generally been a positive in terms of governance and makes sense [for all banks]," Marquardt added, noting that Citigroup Inc. and Bank of America Corp. have divided the roles.

Rather than a slow build of concern around corporate governance, Bank of America split the roles in response to a shareholder backlash against its acquisition of Merrill Lynch in 2009.

The Evercore director views Michael Cavanagh, JPMorgan's co-head of corporate and investment banking, as Dimon's most likely successor.

Cavanagh was chief administrative officer at Citigroup when Dimon was president, and the two also worked together at Bank One Corp.

Others point to Matt Zames as a strong candidate after his ascension to chief operating officer last month as part of a management overhaul.

Zames helped contain damage to the bank after the so-called London Whale trading scandal last year, which cost it $6.2 billion.

The 42-year-old executive had worked at Long Term Capital Management, a hedge fund that blew up and required a bailout led by the Federal Reserve in the 1990s, and was tapped by Dimon for his ability to wind down an illiquid portfolio such as the one left behind by the London Whale team.

But some critics of JPMorgan's performance say separate chairman and chief executive roles would not necessarily ensure greater board accountability, instead pointing to deeply rooted cultural issues.

"There's a country club attitude among boards of the big banks where no one wants to stir the waters," CLSA Ltd. analyst Mike Mayo said.

"The biggest improvement [to corporate governance] would be ensuring directors and nonexecutive directors do their jobs. [For example,] I want to hear what the head of risk committee is doing to make management more accountable," he added.

Mayo is a prominent critic of big banks. And he is one of only two analysts with an underperform rating on JPMorgan, mostly because of what he considers the risk of further regulatory action from the Whale episode in pressuring the bank's share price.

Portales Partners LLC analyst Charles Peabody also said in a note to clients that an independent chairman did not necessarily improve corporate governance.

He pointed to Citigroup, where chairman Michael O'Neill earlier led a push to oust former chief Vikram Pandit and installed Michael Corbat -- a move viewed as a way for O'Neill to consolidate his power at the third-largest U.S. bank.

While Wall Street banks may be slow to split their chairman and CEO roles, the trend is gathering pace.

Among S&P 500 companies that underwent a leadership transition last year, 89% separated responsibilities between the chairman and new chief executive, according to executive search firm Spencer Stuart. But this figure drops to 43% of all companies in the absence of leadership transitions.

The split also can be a positive for shareholders. Corporate governance firm GMI Ratings found in a recent study that five-year shareholder returns at companies that separate the roles were nearly 28% higher than peers.

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For Wall Street, it's not quite splitting time

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