Wednesday, February 5, 2014

Jamie Dimon's Pay Raise: It's About Principles Not Personalities

When a company like JP Morgan Chase raises their CEO's 2013 pay to $20 million, a 74% increase, the public markets should try to process this information to see what it really means. Unfortunately, with Jamie Dimon the discussion is always about personalities and not about fundamentals.

Back when there was talk about splitting the roles of CEO and board Chair, his buddies from Greenwich weighed in.  Why should their opinions matter in a public forum, rather than over a beer? With the latest news, Warren Buffett opined that $20 million was a "bargain."  It might be, but again, with all due respect, shareholders and the capital markets need and deserve more.

When the SEC greatly expanded the required disclosures about Executive Compensation in corporate proxies, it was done to at least provide some insight from the board on how they, as stewards of stakeholder interests, approached issues of compensation.  This is where an analyst or shareholder should look for answers about the $20 million and not to the interesting, but off point opinions of pals and pundits.

Ben Heineman, Jr. of the Harvard Law School's corporate governance project has written the most reasoned introduction to this issue.  After reading his piece, we went back to the original document, namely the proxy: it doesn't give a shareholder any comfort.

Here's what a reader finds about principles for governance and compensation:

  • Maintaining strong governance: Independent Board oversight of the Firm’s compensation principles and practices and their implementation
  • Attracting and retaining top talent: a recognition that competitive and reasonable compensation helps attract and retain the high quality people necessary to grow and sustain our businesses
  • Tying compensation to performance: A focus on the qualitative as well as the quantitative performance of the individual employee, the relevant line of business or function and the Firm as a whole.
  • A focus on multi-year, long-term, risk-adjusted performance and rewarding behavior that generates sustained value for the Firm through business cycles.
  • Performance assessments that are broad-based and balanced, including an emphasis on teamwork and a “shared success” culture
  • Aligning with shareholder interests: a significant stock component (with deferred vesting) for shareholder alignment and retention of top talent
  • Very strict limits or prohibitions on executive perquisites, special executive retirement severance plans, and no golden parachutes
  • Integrating risk and compensation input into compensation determination.
It's hard to disagree, because much of this is the same boilerplate that was produced by most companies before the change in requited disclosure.  What is "competitive and reasonable" compensation? Is $20 million such a number?  "Competitive" is still beset with the same peer group, compensation consultant problems which have always existed.

"A significant stock component with deferred vesting" certainly works on the upside, especially when the big grant is given post-trough with $20 billion in various case settlements having already been agreed.  

To one of Heineman's key points: there is one reference to corporate culture, that of "shared success." What does that mean?  Is that a sufficient description of what kind of corporate culture is required to assure meaningful, risk-adjusted success apart from cycles in the financial sector? 
The author writes,

"The case against the raise begins and ends with JPM’s corporate culture, for which Dimon also bears ultimate responsibility. The broad array of issues for which JPM has paid settlements totaling billions all took place on Dimon’s watch. Except for the inherited Washington Mutual and Bear Stearns bad practices, they all involved JPM employees. They involved core bad behavior: collusion, inadequate disclosure, money laundering, abusive behavior towards debtors, indifference to red flags of massive fraud. They arose in different parts of the bank, not just one dysfunctional unit. They substantially impacted profitability. They have seriously corroded the bank’s reputation with regulators, a number of investors, and the public. JP Morgan’s own report on the matters surrounding the London Whale indicates broad failings. Dimon himself, after virtually all the problems had surfaced, admitted that under his leadership the bank had failed to pay enough attention to controllership issues, and had failed to create an appropriate culture of integrity, compliance and risk management."
We wrote in a prior quarter about the strength of the JPM's last quarter and the platform it provides for future growth.  We also have to admire the CEO's rough hewn New Yorker's approach to evergreen questions like share buybacks. But, the board of JP Morgan Chase--which is not of the quality that a global financial powerhouse deserves--failed to give shareholders a window into their thinking about the $20 million which was based on their fundamental views about economic, management, and ethical principles which underpin the corporate culture that governs the firm they oversee on behalf of stakeholders.

No comments: