Adam Levitin makes a sensible recommendation in a new post:
…what’s at stake in the corporate governance of a too-big-to-fail bank like JPMorgan Chase is not just the share price, but also the public fisc. There is a strong federal regulatory interest in having good governance at too-big-to-fail banks because of our explicit (FDIC) and implicit (bailout) insurance of too-big-to-fail banks. This suggests that federal bank regulators and Congress should be pushing to ensure that too-big-to-fail banks conform with best practices in corporate governance. To the extent good governance at a too-big-to-fail bank includes division of the CEO and Chairman positions, ensuring such a division should be on the regulatory agenda. Financial regulation may need to include governance regulation…
If the shareholder reform mechanism is hopelessly broken–if management entrenchment techniques have simply become too powerful for proxy fights and other modes of shareholder expression to work–then it may be up to the regulatory process to fix the problem. Put another way, if management’s victory in Delaware corporate law is too complete, the only avenue open for reform is through federal legislation or regulation. Management’s sucess in Delaware might have the hydraulic effect of forcing reform of corporate law on the federal stage. (See here for Roe’s discussion of the dynamics of the state-federal competition.) This sort of change has not happened yet, of course, but the case of too-big-to-fail banks presents a special case where the dynamics could potentially be different….
Regulating for governance in too-big-to-fail banks would be a real change in bank regulation as practiced, but the seeds already exist in the current bank regulatory framework: the bank chartering process already requires certain qualifications for officers and directors. Perhaps its time to take the historical bank regulatory framework seriously, not just in terms of governance regulation, but in other aspects as well, such as the social purpose of granting limited purpose private banking charters.
Now of course, it’s easy for cynics to say that our current scaredy-cat regulators would never dare rough up big bag Jamie Dimon. But look at this another way: pressing on the governance front is less intimidating to regulators than tangling with armies of bank lobbyists who present unending arguments about how making the world safer in finance would do horrible things like reduce lending or liquidity (as if anyone but speculators benefits from our current hyper-liquid markets; we hit the point of diminishing to negative returns long ago) or “innovation”. The banks and their minions are expert at moving the conversation into technical terrain where the banks have an information advantage and cowing officials with that. By contrast, the standards for good corporate governance are simple and widely accepted. There’s not a lot of room for debate.
Moreover, as Levitin suggests, this fixation on shareholder value is a recent phenomenon, and really took off in the 1990s to justify CEOs fixating on their own bottom lines as they received more equity-linked pay. It’s an aberration because equity is both legally a very weak and ambiguous promise (you get dividends when the company is sufficiently profitable and management decides to pay them, and a vote that management can dilute by issuing more shares) and a residual claim. It’s the value that’s left after everyone else has been satisfied. But paid to take the new definition of executive responsibilities to heart, CEOs have taken to screwing their various other constituents, as well as taking on more and more risk, to goose short-term profits.
It’s not hard to imagine the “tough on banks” Congressmen like Elizabeth Warren and Sherrod Brown grilling regulators on why they aren’t making banks adhere to good management practices. It should be inexcusable for the CEO of a TBTF bank not to have a succession plan. Dimon’s refusal to get serious about it looks to be a way to assure he can blackmail the bank and stymie demands for changes in how he runs JP Morgan.
And remember, the purpose of having Congressmen pressure regulators (and hopefully having the media take it up) is not so much that any of these particular ideas are likely to come to fruition. It is to create a climate where regulators feel they have public support for getting tougher with banks. As much as that might seem obvious from polls, the banks do a great job of organizing allies to flood regulators with support for their pet wishes during public comment periods on pending regulations. And the trade press is pro-industry. So from the regulators’ perspective, they see a lot of pressure to do what the banks want and seldom find much in the way of objections. So changing that dynamic is key to chipping away at the influence of banks. In keeping, the more experts can find new fronts that can be opened up against the systemically dangerous financial firms, the better.