Break Up the Bank? It’s Not for You to Ask


JPMorgan Chase is trying to put its troubles behind it. Having agreed to pay a $13 billion settlement to the government for its past mortgage-lending misdeeds, it wants to move on. At the big “Investor Day” meeting with shareholders last week, Jamie Dimon, its chief executive, and his top lieutenants extolled the bank’s strong and diversified position in its four main businesses. “I am so damn proud of this company,” Mr. Dimon exclaimed.

But not so fast. Proxy season is around the corner. And, behind the scenes, a skirmish is flaring over what will be put to an investor vote at the bank’s annual shareholder meeting this spring.

Such private battles rage every year in companies across the country, pitting shareholders, who want to hear other owners’ views on topics related to management, against company officials who’d rather not. The Securities and Exchange Commission adjudicates these disputes, deciding which shareholder proposals must be included on a company’s proxy.

Among the more interesting proposals this year is from Michael C. Davidson, a tax accountant and individual investor in Portland, Ore., who owns about 300 JPMorgan Chase shares. The S.E.C. hasn’t yet ruled on whether it will require the bank to have shareholders vote on the idea.

While Mr. Davidson, 72, is new to the shareholder proposal business, the topic he has seized upon is a venerable one — specifically, how to resolve the problem of financial institutions that are too big and interconnected to be allowed to fail.

This threat was supposed to have been eliminated by the Dodd-Frank law of 2010. But it wasn’t, as a throng of experts has acknowledged. Among them are Ben S. Bernanke, the former Fed chairman; Janet L. Yellen, the current Fed chairwoman; William C. Dudley, the president of the Federal Reserve Bank of New York; and Richard W. Fisher, the president of the Federal Reserve Bank of Dallas.

In Mr. Davidson’s view, it’s high time for big-bank shareholders to weigh in on this crucial issue. His proposal, should the S.E.C. allow it to stand, recommends separating JPMorgan’s commercial bank operations from its investment banking and asset management units, similar to the way banks operated after the Glass-Steagall law was passed in the 1930s. The proposal asks the company’s board to create a committee of independent directors “to develop a plan for divesting all noncore banking business segments” and to report to shareholders on that plan within 120 days.

Mr. Davidson said in a recent interview that between the $13 billion settlement paid by shareholders and the nice raise the board gave to Mr. Dimon, “I really think they’re not looking out for investors’ interests.” He added: “I hope the proposal is allowed to appear because I think there should be some kind of debate going on among shareholders on this.”

JPMorgan, of course, disagrees. Its lawyers have argued at length to the S.E.C. that the proposal should be excluded from its proxy. The main reason, the bank contends, is that the proposal involves “ordinary business” or “routine matters,” which under S.E.C. rules can be exempted from a shareholder vote.

To represent it in this matter, JPMorgan has hired an expert who is steeped in the proxy process. He is Martin P. Dunn, a lawyer at Morrison & Foersterwho spent 20 years in high-level positions at the S.E.C.’s division of corporation finance, the unit that determines whether a shareholder proposal makes it onto a corporate proxy. Mr. Dunn did not return a phone call seeking comment, and a spokesman for the bank declined to comment further on the proposal.

But Cornish F. Hitchcock, a lawyer in Washington who represents Mr. Davidson and his proposal before the S.E.C., said the agency typically rejects a shareholder proposal if it involves aspects of company business that according to its rules are “mundane in nature and do not involve any substantial policy or other considerations.” But the debate over too-big-to-fail institutions is about as substantive a policy matter as exists today, he said.

“The philosophy is that ordinary business matters are best left to the management and board, but some situations raise a significant policy issue on which it is appropriate for shareholders to advise,” Mr. Hitchcock explained. “The classic example from many years ago was whether electric utilities should not invest in nuclear power. In that case, the S.E.C. saidnuclear energy raises significant policy issues and shareholders have the right to advise.”

Even if the S.E.C. allowed the proposal to be put on the proxy and a majority of shareholders supported it, JPMorgan wouldn’t have to abide by its terms. As a so-called precatory proposal, it is not legally binding on the company.

Still, JPMorgan wants to keep it off the ballot.

Proposals like Mr. Davidson’s get shareholders talking about issues, which, in turn, forces company insiders and directors to listen. According toGeorgeson, a provider of shareholder consulting services, shareholders of large companies voted on 263 proposals on a variety of corporate governance issues in the first six months of 2013. Many of these — 109 — came from pension funds and labor union investment funds. But even more — 129 — came from individual investors.

Among the topics broached in these proposals were executive pay, disclosures surrounding a company’s political contributions and the repeal of classified boards, where director elections are staggered to protect against the ouster of an entire board at one time.

Mr. Davidson says he thinks his proposal is important, and not only because it would let shareholders express their views on an issue affecting the entire economy. He said JPMorgan shareholders would be better off if the bank was broken up because the individual parts could be more valuable than the combined entity. As precedent, he points to the early 1980s, when AT&T was broken up into regional telephone companies.

“Looking back at the AT&T breakup, the shareholders made out like bandits because the thing was worth a lot more in pieces than whole,” Mr. Davidson said. “JPMorgan is identical — it’s got this banking side and risk-taking side. If you break it in half, it’s going to be worth more to shareholders.”

Top bank officials reject this thesis. Mr. Dimon and his associates contend that the size and scope of JPMorgan’s businesses strengthen rather than weaken the institution. And as for too-big-to-fail, Mr. Dimon said in his letterto shareholders last year that new regulations were well on the way to eliminating the problem. “Clearly more work needs to be done, but we are collaborating closely with the regulators to accomplish this goal,” he wrote.

Nevertheless, given some of the management missteps at JPMorgan in recent years — most notably the London Whale mess — and its regulatory run-ins, it certainly seems appropriate to ask shareholders whether they think the institution is too big to manage. Even as simply a point of information, such a vote could be revealing.

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