From VEA Vice Chair Nell Minow:
I remember taking the escalator down to the CII conference last year and seeing boxes of hand sanitizer and antiseptic wipes. People greeted each other with elbow taps and made grim jokes about this new virus we were hearing about. A week later, everything shut down.
So, this year’s spring conference, like so much else these days, was virtual. And like any CII event, it was informative, well-organized, and indispensable for understanding the people and the issues at the forefront of corporate governance and fiduciary asset management.
Jamie Dimon, CEO and Chair of JP Morgan Chase, largest of the big four American banks, spoke about his company’s operations and investment prospects in the COVID and post-COVID world. Like some of the other big names who speak at CII, he addressed the group as though they were securities analysts or portfolio managers, with little recognition of their unique perspectives and concerns. Saying “I have these board members” and referring to “fiduciary crap” and keeping lawyers out of the room when speaking to people who take board independence and fiduciary obligation very seriously was telling. So was his reluctance to give specifics on the stakeholder and political contribution questions. He repeatedly used the word “mature” to describe his goal for refining the company’s policies. Some of his key points:
Dimon emphasized the resilience of of the business in coping with COVID and expects some of the adaptations his company and others will continue after herd immunity, including more flexibility for workers and for providing services going forward. He mentioned more than once the way the events of 2020 “sharpened the light on some of the terrible things going on in America,” and he expects the changes carried forward to have an impact on housing, offices, and racial equity.
JP Morgan Chase started a COVID war room mid-February 2020. They did not understand the situation at first. For example, they all met in the same room at the beginning. But their immediate focus was on making sure their employees were safe and had the equipment they needed. They “immediately went to masking and plastic barriers” to protect their staff and retail customers. But “we [meaning the US as a whole] weren’t prepared and we should have been.” He criticized the roll-out of the vaccine. “Distribution is terrible. Hospitals are not retail.”
Business continues, but there are disadvantages to Zoom. “We miss the dinner before the board meeting.”
He talked about his involvement with the Business Roundtable’s “stakeholder” statement and the almost immediate walkback: “We do not support radical changes to corp gov structures.” Their commitment is evolutionary, not revolutionary. He did not give specifics. But he did say that it is common sense to recognize that you cannot serve shareholders unless you take care of employees, customers, and the community. He said it twice: “There are moral reasons to do it and there are commercial reasons to do it.” He also said they kept the lawyers “out of the room….If you say ‘fiduciary,’ the average American hears ‘short-term greed…We don’t sit in the board room and talk aobut how much profit we can make next quarter. How can we operate? How can we take care of customers and employees?” He said the focus on these broader issues is definitely a lasting trend. “40 acres and a mule never happened. We don’t get infrastucture, education right, our regulations cripple the formation of small business. Covid and George Floyd pointed out our failures. These policy problems cannot be solved without businesses taking an active interest. The lower 40 percent haven’t had a wage increase in 40 years. I tell other CEOs to get involved in a way that makes sense for you.” With regard to climate change, he said, “I want to be one of the most mature, thoughtful, balanced on this issue, take the time to think it out, make it real. We hope to be at the forefront of mature climate transition.”
The bank has pledged $30 billion in low income housing. But Dimon responded testily when asked whether the fund will be audited. “We will show you every building; we do not need a special audit.”
In terms of the future effect on the market: “No one ever anticipates the true inflection points. I wouldn’t buy 10-year bonds.”
Asked about JP Morgan’s halt on political contributions, Dimon again used the word “mature.” While their PAC is small, “just $2 million” and they gave to Republicans and Democrats, much of it to state and local officials and candidates, they are pausing contributions while they work on a more “mature” policy.
When I asked how all of these developments were affecting the way JP Morgan Chase looked at proxy issues, Dimon said (apparently not knowing it is a statutory requirement) that he did not like pay ratio disclosures, which were impossible to calculate (we call this the Barbie excuse, “math is hard”), and that we have to be “mature” in looking at climate issues. He did not give any additional information about the development of their proxy voting policies.
Stacey Cunningham of the NYSE was, unsurprisingly, very bullish on listed public companies (“public markets provide discipline that is not always there in the private markets”) and not enthusiastic about listing standards as a mechanism for corporate governance improvements. “It’s about balancing investor access and access to capital.” Unlike their rival NASDAQ, which has used listing standards to promote board diversity, they have a network for diverse board members. CEOs provide a list of people they recommend, “qualified board members who happen to be diverse as well.”
SEC Commissioner Caroline Crenshaw described a very significant shift of focus in the Commission’s enforcement. The primary concern, she said, should be on the violation and who is responsible to deter bad behavior and instill confidence in the capital markets. “The amount of shareholder gain or loss is not relevant to deterring misconduct…Unless there is a financial incentive to follow the rules we know there is a temptation to break them…Ensuring the violator pays the price is key to a successful enforcement scheme.”
She said penalties should be tied to the egregiousness of the conduct. The presence or absence of a shareholder impact should not be a threshold issue. Corporate benefit calculations are incomplete. Does undisclosed fraud reduce capital costs? What about buybacks? “One significant benefit we have overlooked is the benefit of encouraging companies to obey the law.” If penalties are high enough to change the behavior, that benefits shareholders. It is more than disgorging gains; we have to disincentivize violations. Pervasiveness and cooperation/self-reporting are additional important factors.
I asked whether the SEC will make use of its authority to prevent directors of companies that violate the law from serving on other boards, and whether they will stop allowing settlements to permit corporate executives to neither affirm or deny a violation of the law. She was not willing to commit to specifics. “We need to use all of the tools in the toolkit, when they’re most effective.” And in response to another question she agreed that “enfranchising shareholders is critical. They need a voice. “
A panel on ESG Ratings included Carolina San Martin of Wellington and Andrew Cave of Baillie Gifford. Both said that they consider ESG factors to be a critical element in evaluating an investment’s potential for financial returns, and that engagement is an essential element of their investment strategy for the same reason. Both said that they “fill in the gaps” with their own data or their interpretation of the underlying data from the ratings, rather than the aggregate results. San Martin said she expects “policymakers will take on the wild west of ESG data,” balancing consistency with new ESG issues like COVID. She believes investors are “coalescing around SASB” as the standard for disclosure. Cave said that ESG is “a great opportunity to see what active can do.”