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The Globe and Mail

The appeal – and folly – of demoting Jamie Dimon

CEO and chairman Jamie Dimon testifies before the Senate Banking Committee in Washington about how JPMorgan Chase lost more than $2-billion on risky trades.

J. Scott Applewhite/AP

JPMorgan Chase & Co. shareholders who are wondering whether to take the chairman title away from Jamie Dimon need to ask themselves if they want to make money or make a point.

From Canada, where the country's banks split the roles of board chair and chief executive officer years ago, it is strange to watch Mr. Dimon fight to keep both jobs against what seems an inexorable shift in corporate governance norms. Mr. Dimon, who has held both roles since 2006, has gone so far as to threaten to quit if he is stripped of the chairman job.

The push to cleave the jobs apart is gathering strength at JPMorgan as a result of governance advocates who say having both roles is a conflict of interest, and because Mr. Dimon has had a rough year due to billions of dollars in "London Whale" trading losses that the bank endured. Last year at the bank's annual meeting, an advisory resolution calling for a split got 40 per cent support. It looks likely to get more this year.

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For all the demands from investors and governance advocates to divide the role of board chief from corporate chief, the evidence on whether it really produces better outcomes is unconvincing. When the division is done as a "demotion," by taking the chairman role from a sitting CEO such as Mr. Dimon, there is at least one study that shows it can turn a stock around – for better or worse. And in JPMorgan's case, it could be the latter.

The appeal of a split is intuitive. The board's job is to oversee management on behalf of shareholders. Having the head of management as head of the board just seems wrong – a conflict.

In this country, the debate feels settled. Of the 60 companies in the Standard & Poor's TSX 60 index, you don't need all the fingers on two hands to count the ones where one person holds both the CEO and chairman roles. The banks here split the roles as part of orderly succession plans a generation of chief executives ago.

The U.S., while moving that way, is still far from having a consensus. As of the end of last year, still fewer than half the companies in the benchmark S&P 500 index had divided the roles.

For companies that have made the move, the evidence is not compelling. Qualitatively, studies have found some boards are good, and some are bad, and it has more to do with the personality of the chairperson than what is on their letterhead.

On a quantitative level, statistically significant performance increases have been elusive, and plenty of studies have tried to find them.

Take one of the more recent attempts. A study published almost a year ago by GMI Ratings looked at 180 companies in North America with market capitalization of $20-billion (U.S.) or more, a group chosen because big companies are complex so "resulting differentials between leadership structures in cost structure, performance and risk exposure would be more marked." Alas, on a performance basis not so much. The study found that over one- and three-year periods, the companies with one person in both jobs outperformed those with split chair-CEO setups. At the five-year mark, the reverse was true.

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Interestingly in the case of Mr. Dimon, a wider study by Ryan Krause and Matthew Semadeni of the University of Indiana found that the reaction depends on the type of change. The pair looked at 1,500 big companies from 2002 to 2005. Splits done when a new CEO comes in to replace one who had held both roles had little effect on a company. But taking away the chairman job from a sitting CEO is different. The authors call this a "demotion." The effect is dramatic.

For companies that are not doing well, "demoting the CEO can be a real boost," the authors pointed out in a post about their work on a blog run by the Conference Board. However, "if a firm was performing well, demoting the CEO sent the stock into a tailspin," they discovered. JPMorgan's stock, it must be said, has been on a tear. A year ago, it fetched about $35. Monday it closed just shy of $50.

"It appears that boards are acquiescing to outside pressure from activist investors or corporate governance watchdogs to separate the CEO and chairperson positions because it is 'best practice,' " Mr. Krause and Mr. Semadeni wrote. "Based on the evidence from our study, we believe this approach is a mistake. CEO-board chair separation can be beneficial if conducted in the right way and under the right circumstances; otherwise, it can be very detrimental."

If there is an area in which the evidence is more clear, it is when it comes to pay. The GMI Ratings study published last year found that "CEOs who also command the title of chairman are more expensive than their counterparts serving solely as CEO. In fact, executives with a joint role of chairman and CEO are paid more than even the combined cost of a CEO and a separate chairman."

GMI Ratings found the median pay package for an executive with both titles was $16-million. The median for CEOs who do not also have chair on their business card is $9.8-million.

But given the size and value of JPMorgan, which earned about $58-million a day last year, and where a $1 move in the stock price is worth $3.8-billion, demoting Mr. Dimon to save on compensation would be penny wise and pound foolish.

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(Boyd Erman is a Globe and Mail Reporter & Streetwise Columnist.)

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