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Setting the benchmark in corporate integrity

US companies call for roles to be separated

More American firms are moving away from the once popular dual management position. JPMorgan and Hess Corp’s boards move towards separate roles as they look to appease shareholders

More American firms are moving away from the once popular dual management position. JPMorgan and Hess Corp’s boards move towards separate roles as they look to appease shareholders

It is a common trend for US corporations to combine the role of chief executive and board chairman. But increasing numbers of activist investors are calling for an independent chair to run the board. The past weeks have seen disputes between shareholders and directors at both JPMorgan and Hess Corp over their dual leadership roles.

Proxy advisory firms Institutional Investors Services and Glass Lewis & Co have both issued reports stating that JPMorgan’s $6.2bn loss illustrated that the board had failed in its oversight of executives. The London Whale trading debacle led the argument for the need to instate broader corporate governance. The firms specifically called for shareholders to vote against the re-election of three board members who served on the risk policy committee when the losses occurred and for CEO, chairman Jamie Dimon to relinquish his position on the board.

“Shareholders should be concerned that company management was allowed to build a massive exposure to credit derivatives, switch VaR models following a breach of risk limits, and value its positions so to minimise losses, and that it was able to do each of these things without triggering a board-level review or a mandatory containment of risk,” Glass Lewis said in a report.

But Lee Raymond, presiding director of JPMorgan’s board, has responded by urging shareholders not to vote to separate the bank’s chairman and CEO positions as it “could be disruptive to the company and is not in shareholder’s best interests.” The bank’s annual meeting on May 21 will see shareholders vote on the re-election of all 11 directors and whether to install an independent chairman. Dimon, 57, has held the dual role of CEO, chairman since 2005 and was widely credited with leading the bank to profitability through the financial crisis, only to have his reputation tarnished by the trading fiasco last year. Dimon has expressed a desire to keep both jobs, but said he appreciates that the decision ultimately belongs to the board.

Conversely John Hess, CEO, chairman of energy company Hess Corp has announced he will step down as chairman shortly days before the shareholder meeting that would have decided his fate. He will maintain his role as CEO but the role of non-executive chairman will go to John Krenicki, former GE vice chairman is shareholders approve the assignment at next week’s AGM. John Hess, son of the founder of the company, had held the dual position for the last two decades. During that time, Hess’s shares have severely lagged behind the gains of the broader energy sector, dipping near to a 40 percent loss last year.

At present, Hess’s shares are up just 14 percent since 2010: markedly less than the average increase of 38 percent on the Dow Jones US oil and gas index.

The move comes as dissident hedge fund Elliot Management Corp, which owns 4.5 percent of Hess shares, accused the board of poor oversight, allowing management to squander shareholder capital in a letter to shareholders earlier this year. “A resolution to split the Chairman & CEO roles at Hess is on this year’s proxy,” Elliott said. “Hess’s announcement today is not a concession or step on the part of the Company, rather it is a reaction to the shareholder vote currently underway. It is significant to note that Hess’s Board recommended against this split only a few weeks ago.”

Research from Russell Reynolds Associates shows a record 44 percent of S&P 500 companies had separate executives holding the chairman and CEO roles at the end of 2012, compared to only 21 percent in 2001.This illustrates how companies in the US are increasingly following suit to the favoured European trend that sees 90 percent of FTSE 100 companies possessing separates positions to promote a balance of power. Calls to split the roles come as directors react to shareholder demands to improve corporate governance and enhance shareholder value.

 

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