Board members must be fit for purpose
“The three directors who oversee risk at JPMorgan Chase & Co. (JPM) include a museum head who sat on American International Group Inc.’s governance committee in 2008, the grandson of a billionaire and the chief executive officer of a company that makes flight controls and work boots.
What the risk committee of the biggest U.S. lender lacks, and what the five next largest competitors have, are directors who worked at a bank or as financial risk managers. The only member with any Wall Street experience, James Crown, hasn’t been employed in the industry for more than 25 years.
“It seems hard to believe that this is good enough,” said Anat Admati, a professor of finance at Stanford University who studies corporate governance.”
Bloomberg.com (May 26, 2012)
Have you heard about the “London Whale?” That moniker was bestowed on a trader in JPMorgan Chase’s London office, which made wrong-way bets on the derivatives markets. Not just a bob or two, though: CEO Jamie Dimon was recently forced to announce that one of the world’s biggest banks had lost $2 billion by betting the wrong way.
Now you might think that one of the world’s most powerful and renowned banks would have proper mechanisms in place to address risk. You might imagine that it has a vigilant board of directors that takes its fiduciary duties to shareholders very seriously. You might be forgiven for speculating that it only employs eminently suitable and qualified persons on the board committee tasked with monitoring risk. And you might easily surmise that the bank must have learned the lessons of the excessive risk-taking that has traumatized the world since 2008, toppling corporations and governments in equal measure.
You might be wrong on all counts.
Bloomberg recently revealed the following about JPMorgan Chase’s risk committee. First, that it includes Ellen Futter, head of the American Museum of Natural History. Second, that this museum accepted large donations from both JP Morgan and the Dimon family. Third, that Ms Futter has been on the bank’s board since 1997. Fourth, that she may have received personal loans from the bank. Fifth, that she previously served on the boards of Bristol-Myers and AIG, at a time when the former was engulfed in an accounting scandal and the latter nearly vaporized itself due to excessive risk-taking.
Do you see anything wrong with that long list? Sadly, JPMorgan did not. Earlier this year, when Ms Futter faced a shareholder challenge on her suitability to be in such an important committee, she was defended by her fellow directors and voted back in.
Ms Futter’s fellow directors on the risk committee also did not have any background in finance or risk management. Or even banking. In an institution that has more than $1 trillion in deposits, and which is now facing investigations from various authorities.
I’m speechless. I don’t wish to imply any wrongdoing on the part of JPM’s board. But there are standards of director independence and robust governance that were hardly being met here.
Looking beyond this example, I truly wonder when all the cowboys who run boards in the world will actually understand their role. A non-executive director is NOT there to fulfil trivial statutory duties; NOT there to nod politely or nod off during meetings; NOT there to be part of a club of back-scratching buddies who all go with the flow.
The job of director is one of the most important in the world. Directors shape the destinies of corporations, even nations. They are supposed to exercise wisdom and diligence, and owe a duty of care in everything they do. That is why they must stay independent of managers, be fit for purpose, and provide proper scrutiny and oversight. I live in hope that this will happen someday.