Delamaide: CEO pay shows need for board change

WASHINGTON — Wall Street often seems to be on another planet and at no time more so than when a chief executive gets a 74% raise to $20 million in a year that his bank agrees to pay $23 billion in fines to settle charges of fraud and mismanagement.

When the board of directors at JP Morgan Chase decided last month to boost the pay of Jamie Dimon from the measly $11.5 million he had received in the previous year, the rest of us could just shake our heads and say, "Crazy."

But the directors, who represent the shareholders and bear ultimate legal responsibility for the company, argued in a regulatory filing that Dimon deserved the raise because of the bank's "sustained long-term performance; gains in market share and customer satisfaction; and the regulatory issues the company has faced and the steps the company has taken to resolve those issues."

Let's keep in mind that the chairman of the board of directors is none other than Jamie Dimon himself, though compensation is decided upon by the "independent" directors — those who don't work for the company or have any substantive ownership stake.

Also, even though $20 million may seem like a lot of money to the rest of us, it's a far cry from the $49.9 million Dimon received for 2007.

As is typical in most companies, board members at JP Morgan are mostly good friends of the chairman. Lee Raymond, former CEO of ExxonMobil who was made "lead independent director" at JP Morgan last fall, was described by The Wall Street Journal as a "mentor" to Dimon.

A new "independent" director who was named at the same time was Linda Bammann, who worked for Dimon at Bank One before it merged into JP Morgan, and then worked in the merged bank until 2005. Under Wall Street's generous rules, you can be "independent" even as a former employee after three years away from the company.

It is in this context that Simon Johnson, an MIT professor and a prominent bank critic, posted an open letter to JP Morgan shareholders last week after forme! r FDIC chairman Sheila Bair suggested in an interview that Johnson would be a great addition to the bank's board.

While the letter was tongue-in-cheek, Johnson's advice for shareholders was quite serious. First and foremost, he wrote, "we need a more independent board with a greater ability to receive and assess timely information about what is actually happening within the company."

Johnson cited the remark last fall by another independent director at the bank, Laban Jackson, who told a group of investors in Chicago, "We've got these things that we actually are guilty of and we've got to fix them." And Jackson added: "It's embarrassing for the board."

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Johnson also suggested, not surprisingly, that the board needs to change the way it decides on compensation for its executives, starting with CEO Dimon.

His main recommendation, however, and the reason he knows he will never be elected to the board at JP Morgan or any other bank, is to break the bank up into smaller pieces.

Johnson noted that smaller financial institutions currently attract substantially higher valuations in the stock market than do the megabanks.

Money columnist Darrell Delamaide.(Photo: H. Darr Beiser, USATODAY)

"My interpretation is that this is largely because the biggest banks are not run in the full interests of shareholders," this economist says. "The operations of these companies are so complex that no one is fully in control."

Bair's suggestion to put Johnson on the JP Morgan board came in an interview with ProPublica's Jesse Eisinger regarding her own decision to join the board of Banco Santander, a Spanish bank with substantial ! foreign o! perations that many consider to be one of the best banks in the world.

Bair's decision drew some flack because of her outspoken criticism of the revolving door in Washington, which lands former regulators in cushy banking jobs if they have behaved well in their government posts.

Of course there is a world of difference between drawing a director's remuneration of tens of thousands of dollars and the tens of millions that former Treasury Secretary Robert Rubin, for example, received as "senior counselor" at Citigroup after his Washington tenure.

Bair, who was critical of government policy toward banks both while in office and afterwards as senior adviser at the Pew Charitable Trusts, believes reformers like herself can be useful on bank boards because they "understand banking and markets but have a different perspective on the role of regulation and financial stability."

In addition to suggesting Johnson for the JP Morgan board, Bair also recommended the former chairman of the Commodity Futures Trading Commission, Gary Gensler, for the Goldman Sachs board and Stanford professor Anat Admati, another prominent bank critic, for the board of Deutsche Bank.

Everyone knows this will never happen. But perhaps shareholders and directors at these banks will take note of the critics. As Johnson observes in his letter to JP Morgan shareholders, "further change at the top of JP Morgan Chase would be helpful to you, to the financial system and to the broader economy."