Sign up for regular news, views and insights about corporate governance

Job title


Setting the benchmark in corporate integrity

Boards on their backs

Banks must reassess their internal governance structures, writes Simon Johnson
James Dimon, chairman and CEO of JPMorgan Chase and Alan Schwartz, president and CEO of Bear Stearns testify before Congress

Banks must reassess their internal governance structures, writes Simon Johnson

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.

Big banks’ boards are supine for three main reasons. First, and most important, there is no market for control over the biggest banks. One cannot build up a significant shareholding and use it to put pressure on boards – let alone pursue a hostile takeover. The London Whale is a case in point. The pressure brought to bear on JPMorgan Chase was completely inconsequential – nothing significant will change.

This is primarily because regulators – despite what they may claim – effectively protect megabanks from market discipline. “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, most board members lack sufficient relevant expertise. Who on the current board of JPMorgan or Citigroup has real experience running a giant complex trading operation (which is what will make or break these companies over the next decade)? Who among them understands macroeconomic risks not in terms of the platitudes of the prevailing consensus, but as the tail risks – the low-probability, high-impact events – that always wag the dog of financial crisis?

Unqualified board members do not ask hard questions. And, 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.

As a result, megabanks’ senior managers are not pressed to remove layers of opaqueness that shield their risk-taking from effective scrutiny. This helps to keep board members in the dark – and gives them a convenient excuse for not really understanding how the business works.

Effective governance is possible under various formal arrangements. In principle, a strong outside lead director can be just as effective as an independent chairman – a fair point that has been made in recent weeks.

But which huge banking conglomerate has such a lead director today? Which board members are willing and able to stand up to CEOs? That has certainly not been the recent experience at JPMorgan Chase.

Finally, regulators, too, have been rendered docile in the face of the megabanks’ CEOs. Regulators have the power to require that boards become more powerful – or at least minimally effective. For example, they could tighten the qualifications needed to become a bank director (in the United States, for example, the requirements are not serious).

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

The regulators acquiesce because, simply put, they are afraid. Mostly, they are afraid that being tough on bank governance will somehow disrupt the flow of credit. It is a silly and baseless fear, but that is how modern regulators think and act – in a state of constant, irrational anxiety.

The banks in question are so large and so central to the functioning of economies that each of them is 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.

The biggest banks were badly run in the years leading up to the crisis of 2008 – exhibiting a toxic mixture of hubris, incompetence, and excessive leverage – and their governance problems today are worse than they were in 2005 or 2007. The 2008 crisis was followed by a long, hard recession; we should not expect a different scenario now.

Simon Johnson is a professor at MIT’s Sloan School of Management and the co-author of White House Burning: The Founding Fathers, Our National Debt, And Why It Matters To You.

© Project Syndicate 1995–2013



OXY’s chairman ousted by shareholders

The oil and gas company is to have undergone a recent change of personnel, the chairman herein being forcibly made to step aside by activist shareholders

Boards under threat as shareholders demand more power

Activist shareholders demand right to action by written consent, but risk undermining board authority

Social business collaboration enhances corporate communications

Social media technologies offer unprecedented digital opportunities to share information, communicate and collaborate which are now being translated into a means of internal corporate communication management

Shareholders reject Julius Baer pay report

Disgruntled shareholders at Swiss private bank vote to reject remuneration report at annual meeting

NSE establishes Corporate Governance Index

The NSE has partnered with the CBi in an attempt to offset perceptions of Nigerian capital markets being riddled with corruption

FRC report reveals highs and lows of UK governance

A recent report by the FRC reveals the extent by which recent reforms have changed corporate governance in the UK, as well as the effect non-compliance has had on the organisation’s finances

Redefining corporate responsibility: award winners 2013

Organisations are seeking to correct past workplace models, taking stock and embarking upon a new age of responsibility. Here, the Corporate Governance Report celebrates those firms carrying the governance torch

Japanese companies urged to reconfigure governance

A recent survey has indicated that investors are dissatisfied with the current system of governance commonly undertaken by Japanese companies, many urging for more comply-or-explain systems equivalent to that of EU-based companies

Italian banks to “change corporate governance”

Banks with more out-dated corporate governance structures were hit hardest by crisis, according to Fitch statement

UK’s FRC rejects calls for compulsory audit rotation

Despite pressure to encourage greater competition in the UK’s accounting market, regulator waters down its proposed rule changes

Pay ratio disclosure leaves directors unconvinced

The SEC’s recent pay ratio proposal has given rise to criticism and suggestions that it is an ineffective way of curbing excessive executive pay

‘Lack of clarity’ in UAE corporate governance

Report raises concerns over listed companies failing to provide clear corporate governance policies

RBS shareholders file suit against bank and former directors

RBS shareholders have launched a class-action suit over the 2008 rights offering a few months before the bank was bailed out by British government

UAE discusses role of CSR in sustainable development

Philanthropy and sustainability debated at forum arranged by UAE’s University Leadership Council