Economics

Boards on Their Backs

May 23, 2013 Simon Johnson

The recent governance controversy at JPMorgan Chase has masked a much larger issue. Five years after the largest financial crisis in almost 80 years, one can count the number of properly qualified board members – across all megabanks – on the fingers of one hand.

WASHINGTON, DC – The recent governance controversy at JPMorgan Chase has masked a much larger issue. Regardless of Jamie Dimon’s victory in retaining his dual role as CEO and chairman of the board, the more important failure on display was that of the board of directors itself – a problem that affects almost all of the world’s megabanks.

This is completely obvious at JPMorgan Chase. The report of the recent bipartisan investigation, led by US Senators Carl Levin and John McCain, into the infamous “London Whale” trades provides just one example. There is also the litany of complaints and legal cases now surrounding the firm. It is difficult to see JPMorgan Chase escaping its past anytime soon.

But the problem is much broader: Not a single global megabank has a well-functioning board. Their members kowtow to CEOs, do not examine management decisions closely, and, with very few exceptions, rubber-stamp compensation requests.

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Simon Johnson

Writing for PS since 2007
169 Commentaries

Simon Johnson, a former chief economist at the International Monetary Fund, is a professor at MIT’s Sloan School of Management, a co-chair of the COVID-19 Policy Alliance, and a co-chair of the CFA Institute Systemic Risk Council. He is the co-author (with Daron Acemoglu) of Power and Progress: Our Thousand-Year Struggle Over Technology and Prosperity (PublicAffairs, 2023).

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Gunnar Eriksson May 26, 2013

All large banks should be required by society to present a mission for their operation with demonstrated strategies for its implementation. Large organizations consist of people and a mission will be a backbone for their daily actions. This course would be less scary for the political class and should in a later stage improve the ability to both legislate and enforce existing laws.
For a bank a simplified mission should be “to absorb the savings of society (private and public) and transfer those to accessible credits for creative ventures at reasonable risk”. The better the organization fulfils the mission the more profitable it should be judged. Today the leftovers when executives have remunerated themselves are handed over to equity holders (that at the most are exposed to a minimal risk) as profit. Executives remuneration and dividends related to equity should be defined as cost for the operation.
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Liz Banker May 25, 2013

Had the per share value been low as it is with its nearest TBTF competitor, the outcome of last Tuesday's referendum on Mr. Dimon would have been different; (Exhibit A: BofA's acquisition of CW; Kenneth Lewis taking an early retirement rather facing very angry shareholders). The JPM Chase tally wasn't even close (unfortunately) but a wake-up call to Chase management for some organizational changes, will evolve. It's hard to fathom what qualifies some of these board members to occupy the round table; perhaps it functions more like a quasi-governmental agency of who you know more so than what you know; are lobbied in a similar manner; holds little accountability, minimal transparency, and lacks public interest. Senator Elizabeth Warren has retained the same publishing rights attorney as the ex-U.S. Treasurer Mr. Geithner for their respective accounts of TBTF, in 2014. That outta make for some interesting reading in the parallel universe.
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Frank O'Callaghan May 23, 2013

The big banks are not essential to the functioning of the economy. They are essential to it's dysfunction.

These financial institutions have destroyed much wealth and mis-allocated more. They have consistently and grossly over-rewarded their own failures. They have generated great and increasing misery for a great many people who have had no part in the casino circus that has run amok with the past thirty years.

Supine governments have betrayed their electorates in favour of these parasites. The boards of the banks are the creatures of the CEOs. They are less than a flimsy loincloth. They preserve dignity only with the collusion of those who deliberately look away.

Galbraith long ago pointed out that the technocracy ruled the corporations. It is as true now but even more blatant.
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