By Chuck Nathan, Partner and Senior Advisor, RLM Finsbury
JPMorgan shareholders’ recent rejection of a proposal to split the CEO and Chairman positions was the most talked about proxy vote during the 2013 annual meeting season. While the 68% to 32% vote against was a resounding victory for Jamie Dimon and JPMorgan’s board, what is less clear is whether the vote signals any significant change in a long-standing, fundamental disconnect on proxy voting between portfolio managers and corporate governance decision makers at institutional investment managers.
Many people do not realize that in most cases portfolio managers don’t control the voting lever on governance matters. While portfolio managers always have had a seat at the table on votes related to economic matters (for example, a merger or acquisition), when it comes to corporate governance issues, a separate internal group of corporate governance specialists typically is charged with deciding how to vote portfolio shares; or, in some cases, voting is outsourced to one of two proxy advisory firms staffed by corporate governance specialists. As a result, decisions on governance-related proxy votes are usually made by corporate governance advocates who vote in accordance with what they consider as “best practices.” Because there is no convincing empirical evidence that these so-called best practices lead to shareholder wealth creation, votes cast on this basis are an expression of an ideology that all too frequently is divorced from, or worse, ignores economic consequences.
The dichotomy between governance ideology and shareholder wealth creation is illustrated by the long-running debate about mandatory splitting of CEO and Chairman roles. Portfolio managers and analysts tend to have a practical, “don’t tinker with success” philosophy when it comes to corporate governance matters that do not have obvious economic or financial implications. As a result, this group generally does not support mandatory separation, except in cases in which a company has a concrete governance problem which could be solved by the separation of CEO and board chair. On the other hand, those with the voting power on governance matters usually vote to separate the functions of CEO and board chair as a matter of principle, without considering how well the company is performing or whether separating the roles will lead to poorer performance.
So, does the JPMorgan shareholder vote, as some governance theorists believe, signal a significant move toward eliminating this philosophical schism at institutional investment managers? The optimists who believe change is afoot interpret the JP Morgan proxy results as evidence of the emergence of a more rational system in which investment decision makers are fully integrated into the voting process, leading to financially informed votes on corporate governance issues.
While I would like to side with these optimists, I find myself in the glass-is-half-empty group. It seems to me that rather than being the result of some progress on voting philosophy at institutional investors, the outcome of the Dimon vote was largely attributable to the strategy utilized by JPMorgan to position this vote as a referendum on Dimon’s and the board’s leadership – thereby giving it economic significance – instead of as a corporate governance best practices issue. By so doing, and by mounting a highly effective communications campaign opposing the proposal, JPMorgan made it impossible for portfolio managers not to care enough to demand a big voice in determining how to vote.
A significant reason JPMorgan was able to achieve this strategic positioning of the vote is because it is the largest bank in the United States and has the ability to get a hearing everywhere it wants. Given its prominence, recent success, and the star power of its CEO and Chairman, JPMorgan may have been in a unique position to transform the nature of the proposal into an economic issue and make it one that portfolio managers controlled.
Considering the Dimon vote in this light suggests that while the biggest U.S. companies may be able to prevail against corporate governance advocates on selected issues, by and large, they and their smaller, less powerful brethren will continue to be subjected to an expanding corporate governance agenda based on perceptions of best practices that lack empirical support.
The JPMorgan vote was indeed a victory for JPMorgan, its board and Jamie Dimon. But it is unlikely that it was the game-changer in the world of corporate governance that optimists are hoping it is. While certain large institutional investors have modified their voting procedures to include portfolio managers on all issues, most have not or have done so in a way that leaves corporate governance advocates with full control over voting decisions.
For the time being at least, the separate universes of investment decision making and voting decision making that permeate U.S. investment managers are continuing along parallel paths. Absent JP Morgan’s successful strategy of imbuing this proxy vote with compelling economic significance, we may very well have seen a different outcome. The challenge for any board that believes shareholder value is best served by defying the conventional governance wisdom remains great.
About the Guest Blogger:
Chuck Nathan advises global clients on M&A, financial transactions, governance, Board issues and shareholder matters.
Prior to joining RLM Finsbury, Nathan was partner at Latham & Watkins, where he represented companies and financial advisors in many significant, high-profile mergers and acquisitions.
Nathan has been named by the National Association of Corporate Directors as one of the 100 most influential corporate governance professionals for two consecutive years. He is the renowned author of many articles on M&A and corporate governance topics, is a frequent panelist at M&A and corporate governance seminars and programs, teaches M&A at Yale Law School, and has chaired a number of bar association committees. Nathan received his B.A. from The Johns Hopkins University and his J.D. from Yale Law School, where he graduated summa cum laude.