Simon Johnson: Board Members 'Kowtow to CEOs' at Megabanks

Friday, 24 May 2013 08:19 AM

By Michael Kling

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While Jamie Dimon's fight to keep both the CEO and chairman at JPMorgan Chase posts got plenty of attention, the controversy masked the real problem in corporate management, argues Simon Johnson, a former chief economist of the International Monetary Fund who is now an MIT professor.

Sure, JPMorgan had management mishaps, highlighted by the infamous London Whale trades. But the problem goes far beyond that, Johnson asserts.

"Not a single global megabank has a well-functioning board," Johnson writes in an article for Project Syndicate. "Their members kowtow to CEOs, do not examine management decisions closely, and, with very few exceptions, rubber-stamp compensation requests."

Editor's Note: This Wasn’t an Accident — Experts Testify on Financial Meltdown

Why are boards supine before bank management?

"First, and most important, there is no market for control over the biggest banks," Johnson explains, since no one can obtain enough shares to put any pressure on boards. That's largely because regulators "protect megabanks from market discipline," he says.

"'Systemic importance' has become an excuse for maintaining impenetrable entry barriers (yet another reason why executives want their firms to be regarded as too big to fail)."

Second, few board members have experience that can help them oversee the huge and complex financial institutions or understand their financial risks. Not properly qualified, board members do not ask hard questions. So bank executives need not reveal risks their banks are taking.

"And, five years after the largest financial crisis in almost 80 years," Johnson writes, "one can count the number of properly qualified board members — across all megabanks — on the fingers of one hand."

A strong outside lead director can, at least in principle, be as effective as an independent chairman, Johnson concedes. But he challenges anyone to name a large bank with a good lead director or board members willing to stand up to CEOs.

And third, regulators can require that boards become more effective by, for instance, strengthening board qualification standards. But they don't.

"Instead, regulators stand idly by while bank boards remain self-perpetuating clubs, with membership regarded as little more than so much social plumage."

Regulators worry that tougher bank governance will disrupt capital flows, a "silly and baseless fear," Johnson says, arguing that megabanks are so large and important they are too big to regulate.

"Whenever small groups of individuals acquire that much power relative to the state and the rest of us, there is big trouble ahead. Power corrupts, and financial power corrupts the financial system."

Reuters columnists called Dimon's re-election win a "Pyrrhic victory" and a "defeat for corporate governance." Dimon and the board devoted much time to preserving titles instead of running the megabank.

Shareholders, they wrote, "chose fear and personality over good corporate governance. That’s a big disappointment."

Editor's Note: This Wasn’t an Accident — Experts Testify on Financial Meltdown

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