U.S. Department of Justice: Big Banks May Be Above the Law

The Financial Times reports that lawmakers in the U.S. Congress have claimed the Department of Justice has been “too soft on big banks and their executives by failing to bring criminal cases related to the financial crisis.” In the years following the financial crisis of 2008, no Wall Street executive was criminally charged with fraud. The U.S. Justice Department did not go after the bankers for their lack of due diligence regarding their banks’ purchases of sub-prime mortgages from mortgage originators. At Citibank, for example, a manager in the bank’s due diligence department estimated that 50% to 80% of the approved mortgages did not meet the bank’s credit policy, yet Robert Rubin, the CEO at the time, did not act on the manager’s red-flag email. This suggests that a criminal complaint could have been lodged against the bank itself, but then what would be the implications for the financial system were Citibank to go under from being found criminally guilty?

Simply stated, a company can be so large that its failure due to a guilty verdict could harm innocent third parties, including stockholders, employees, suppliers, and even the general public if the bankruptcy triggers a systemic collapse of the financial system. Such concerns are called collateral consequences. After the collapse of Lehman Brothers in September 2008, systemic risk because a particularly salient concern for criminal prosecutors at the U.S. Department of Justice. Swayed by a desire to minimize the potential disproportionate harm to innocent parties from a verdict-triggered major bankruptcy, the prosecutors believe they are obligated to consider collateral consequences even if that means that big banks are immune de facto from criminal prosecution. Unfortunately, the rule of law takes a major hit in this judgment. Therefore, it is worthwhile to ask whether the Department of Justice should be looking at collateral consequences at all. In my view, it should not.

                                                                                               Mythili Raman testifying before Congress. mainjustice.com

Mythili Raman, Acting Assistant Attorney General in the Criminal Division, has argued that collateral factors as a group should be considered. Testifying before Congress on May 22, 2013, she cited “the disproportionate impact on innocent third parties, including the public at large,” as being entirely appropriate for prosecutors to consider. Her reference to the general public means that systemic risk is among the legitimate factors in her view, and yet she also said, “the size of a corporation will never be a factor in and of itself and that no institution is too big to prosecute.” Crucially, her position is that one particular consequence should never be the only factor. “A single collateral consequence cannot be the reason.” However, she added that “collateral consequences are issues that we must and do consider.” Because banks too big to fail tend to have more than one significant collateral consequence (e.g., many stockholders and employees, as well as systemic risk), such banks may be too big to jail.

In testimony before Congress in March 2013, U.S. Attorney General Eric Holder admitted that the lawyers in his department were wary of the “negative impact” on the economy from prosecuting a large financial institution. “(I)t is a function of the fact that some of these institutions have become too large.” Differing from Raman, he thought the size of large banks “has an inhibiting influence – impact on our ability to bring resolutions that I think would be more appropriate. . . . (a)nd I think that is something that we – you all – need to consider.” I want to unpack this rather robust admission.

Firstly, the Attorney General was hinting at what Sen. Kaufman had observed while in office. Namely, it should not be the F.B.I.’s concern whether the Wall Street banks continue as viable concerns. In other words, systemic risk or even collateral consequences more generally have no business being considered by prosecutors whose job it is to enforce the law. Including systemic risk among the collateral consequences has further compromised the rule of law. As Sen. Charles Grassley put it, “It was stunning to hear the nation’s top prosecutor acknowledge that, from the justice department’s perspective, the big banks are too big to jail. This is worrisome for the fair application of justice in our country.”

Secondly, the Attorney General was suggesting that Congress should reduce the size of the biggest banks—those with over $1 trillion in assets. He had doubtless concluded that the Dodd-Frank Act had not been sufficient to solve the problem of banks being too big to fail. If no systemic risk exists, then third-party collateral damage is not disproportionate on a societal basis and the trade-off does not exist. Accordingly, the Huffington Post observes that lawmakers “may be encouraged to apply even more public pressure on efforts to crack down on big banks.” While Raman was testifying, Rep. Sherman, the chair of the full committee, noted that the fact that the Department of Justice considers collateral consequences rather than simply enforces the law is enough justification to break up the big banks. The tension between him and Raman on whether collateral consequences should be considered even altogether can be transcended with regard to the big banks only if they are broken up. The question is thus whether imposing disproportionate capital reserve requirements on the biggest banks would be enough.

In other words, the technical prosecutorial question leads us to the more fundamental questions of whether we as a society are to tolerate companies that are too big to fail, and  if not, how the whales can be shrunk. Considering that the rule of law itself is being compromised, at least perceptually, there is good reason to conclude that we as a democratic society can ill-afford the continued existence of banks too big to fail. Unfortunately, being too big to fail carries with it tremendous political power—muscle that can be used all too easily to resist legislative proposals oriented to downsizing the mammoth banks. This is the real problem that dwarf whether the Department of Justice has really been reaching out to financial regulators for information on probable collateral consequences or even whether criminal intent beyond a reasonable doubt can be ascertained. Namely, can a republic resist the power of its most powerful for the good of the republic? It may even be that the big banks are the force behind assertions such as Raman’s that collateral consequences “must and should” be considered in deciding whether to prosecute. Whether Raman realized it or not, the implication that the rule of law applied impartially should be compromised by the magnitude of the predicted collateral consequences from a corporate conviction is, euphemistically speaking, troubling.

Sources:

Shahien Nasiripour and Kara Schannell, “Holder Says Some Banks Are ‘Too Large’,” The Financial Times, March 7, 2013.

Congressional Hearing, “Who Is Too Big to Fail: Are Large Financial Institutions Immune from Federal Prosecution?” Oversight and Investigations Committee, U.S. House of Representatives, May 22, 2013.

Shahien Nasiripour, “Too-Big-To-Jail Dogs Obama’s Justice Department As Government Documents Raise Questions,” The Huffington Post, May 22, 2013.

“The Untouchables,” Frontline, January 22, 2013.



Tim Cook Testifies before Congress on Apple's Tax Havens: Visionary Leadership or Playing Defense?

Founders and otherwise visionary leaders in business can be distinguished from managers, even though a manager may be running a company. For one thing, managers may resent leaders for being able to take in a larger view while relegating—even dismissing the petty, which can be so alluring to the managerial mentality. Leaders in turn may view the implementation of a vision as nugatory at best. More abstractly, change as paradigmatic (i.e., shifting from one broad framework to another) has its fans (i.e., visionary leaders), while the status quo has its own defenders (i.e., managers). Vision and big ideas are typically associated with a company’s founder or visionary leader, whereas bureaucracy tends to go with the implementation-focus of managers (including executives). In short, to suppose that leadership and management are the same is to ignore a lot that separates them. In the case of Apple, the shift from leadership to management that occurred with the passing of Steve Jobs may be at least partially responsible for the subsequent decline in the company’s stock price. In this essay, I explore the change at Apple to demonstrate why management should not be conflated with leadership.

 

Generally speaking, the shift from a company’s visionary founder to status-quo management can introduce political and psychological instability in the organization as managers struggle to fill the shoes of the founder both in terms of ideas and power. Although managers have a sufficient instinct for power to quickly grab up any available power, none of the epigones are likely able to be visionary as they are detail- and control-oriented. Although a way to develop a visionary ability may yet be found, I suspect that the wherewithal is either built into a person or it isn’t. That is to say, none of the managerial executives surviving a founder at a company are likely to stand out as a visionary leader, not to mention as THE visionary leader.

 

Steve Jobs of Apple is an interesting example of a founder who took quite naturally to being the visionary leader at Apple. Rather than merely being incremental improvements, the product innovations resulting from his unique ideas changed the world. The ipod, for example, stood to make even the laptop obsolete even as it in turn was beginning to replace the television for many young adults. Meanwhile, the smart phone was fundamentally altering the notion of a telephone. Crucially, Jobs could treat the assumptions that we take for granted regarding the products that we use as relics or artifacts of an age, and thus as replaceable. He could envision new products not beholden to those now-antiquated assumptions. This is the dynamic in visionary leadership. Even though questioning taken-for-granted assumptions can be taught, imagination is likely either something someone has or does not have. Hence, it is unlikely that people can be trained to be visionary leaders. Managers in particular may be especially handicapped.

 

It is thus significant that Tim Cook took over as CEO in 2011 after Jobs died. Cook had come to Apple in 1998 as an expert in sales and operations. According to the New York Times, he created “the efficient supply chain that helped catapult the company into the top ranks of the technology industry.” Being an expert in operations with an orientation to efficiency is tantamount to having “manager” tattooed on one’s back. Perhaps nothing else could be further from visionary leadership. The New York Times observes that whereas Jobs “was famous for his creative vision and flamboyant performances at introductions of the company’s products,” Cook “was known for his behind-the-scenes work—particularly for his shrewd negotiating tactics with suppliers.” Creativity and attention-getting can be associated with visionary leaders, whereas being oriented to tactics “behind-the-scenes” is oriented to implementation and thus managing that which has been set out as a goal. It is quite understandable that the shift from Jobs to Cook was not an easy one for the company.

 

A year after Jobs’ death, the senior management of Apple was shaken up in a move that Cook formally orchestrated. It has the dull ring of old-fashioned “office politics.” Specifically, Cook pushed Scott Forstall and John Browett out of the company. To be sure, both managers had “stumbled,” according to the Wall Street Journal. Forstall had overseen the new mapping service, which was rushed out, “riddled with bugs.” Meanwhile, Browett had overseen “the faulty implementation of a new staffing formula that cut some employee hours.” In spite of these vulnerabilities, it is also true that the two departures took place “as new fissures” emerged “among Apple executives, after some took on new roles following the death [of Steve Jobs].” That is, the organizational phase of transition from the leader-founder to the manager-executives was a contributory factor.

 

Pointing to the void that typically exists after the departure of a visionary leader, Forstall observed that there was no “decider” after Jobs had left the company. Having been used to a central authority, the managers did not sufficiently fill the void. They could not. Besides being insufficiently constituted to be viewed as unique, they had been so dependent on Jobs that they did not do enough to make up for the gaps in authority following his death. As a result, problems such as in the mapping service and the staffing formula fell through the cracks organizationally. The mapping service, for instance, might not have been rushed out had there been a process of checks not depending on the system based on a central authority. Therefore, Scott Forstall and John Browett were not completely to blame for the failures attributed to them.

 

Whereas Steve Jobs’ “outsize personality had kept managers in check” by “always casting the winning vote or by having the last word,” Tim Cook was not able to keep the clashes from manifesting out in the open. For instance, Ive and Forstall “clashed so severely” that “they avoided being in the same room together.” Previously, they had always just let Jobs decide. With that option gone, the additional pressure of decision-making exacerbated the acrimony. Ive and Forstall could no longer simply push their unresolved disputes to Jobs’ desk. Either the two men had to resolve their own disputes, or the problems fell through the cracks.

 

By announcing “Now the Tim Cook era at Apple Inc. really begins” after the shakeup, the Wall Street Journal  erred in implying that Cook had acted as a leader. Whereas managers at the company had “lived in constant fear of falling victim to a Jobs’ tirade or a whim,” Cook was “pushed into” firing Forstall and Browett in order to “steady the ship.” Such a muted, or “small picture,” response is a good indication that Apple had moved into the manager-executive stage. It is no wonder that Apple’s stock fell nearly $100 in six weeks. According to the Wall Street Journal, the firings failed “to address the question of who will fill [Steve Jobs’] role as Apple’s ultimate decider on products.” Being pushed into incrementally stabilizing an organization without addressing the more fundamental issue does not evince leadership. A visionary leader acts proactively in keeping organizational politics from getting out of hand because they are trivial in relation to the leader’s vision. In fact, the vision should include making that fundamental issue obsolete by “reimagining” the organization itself.

 

                                                    Tim Cook on the "societal stage," testifying at the U.S. Senate.   Getty Images
 

For a CEO, such “reimagining” can or even should include society itself. Steve Jobs doubtlessly imagined a very different world with his product ideas. In contrast, when Cook was asked while testifying before a U.S. Senate committee why two-thirds of Apple’s global pretax income in 2011 had been recorded in Ireland even though only 1% of the company’s customers were located in that low corporate-tax state in the E.U., he replied, “Unfortunately, the tax code has not kept up with the digital age.” Had he been a visionary leader, he most likely would have used the opportunity to present his vision of an alternative basis for corporate taxation that is in sync with the age. Instead, he “trenched in,” insisting that Apple had paid taxes on all of its profits. Even though a Senate report had found that Apple had paid little or no corporate taxes on at least $74 billion in the previous four years, Cook insisted, “We pay all the taxes we owe, every single dollar.” Astonishingly, Sen. McCain credited Cook with managing “to change the world, which is an incredible legacy for Apple.”

 

Sources:

Jessica E. Lessin, “Apple Executives to Exit,” The Wall Street Journal, October 30, 2012.

­­­­­____________, "Apple Shake-Up Signals Tim Cook Era,” The Wall Street Journal, October 31, 2012.

Danny Yadron, Kate Linebaugh, and Jessica Lessin, “Apple CEO Defends Tax Practices as Proper,” The Wall Street Journal, May 21, 2013.

 Nelson Schwartz and Brian Chen, “Disarming Senators, Apple Chief Eases Tax Tensions,” The New York Times, May 22, 2013.

Jamie Dimon Wins Stockholder Vote: Exploiting Conflicts of Interest Undercuts Fairness

Chairman of JPMorgan since 2006 and CEO a year longer, Jamie Dimon faced down a daunting stockholder vote on May 21, 2013 on whether he should be allowed to retain both roles. Despite the bank’s $6.2 billion trading loss, deeply flawed risk-management oversight, and “credibility issues” with regulators, only about 32% of the votes cast were in favor of the nonbinding resolution that the chair and CEO jobs be separated. Interestingly, not only does the chair/CEO duality have an inherent conflict of interest because part of what a board (including its chair) does is hold management (including the CE) accountable, the means by which the pro-duality side campaigned also included conflicts of interest. I cannot help but wonder whether Jamie Dimon, his immediate subordinates, the bank’s board directors and even the stockholders who altogether voted a supermajority of shares in support of Dimon’s two roles were negligent ethically in failing to even recognize the institutional conflicts of interest involving Dimon and the board. To the extent that recognition existed, permitting the conflicts to exist and in some cases knowingly exploiting more than one at a time are even more squalid than merely being oblivious to them. To the extent that structural conflicts of interest were enabled through the campaign and in the election results, JPMorgan Chase can be likened to a house of cards. This does not bode well for the financial system and broader economy to the extent that the largest American bank holds systemic risk (i.e., “too big to fail”). I look at the campaigning first, as doing so will lead us directly to the main conflict of interest that is at issue here.

The directors and/or Dimon may have exploited a conflict of interest had either been behind the decision to keep the running vote tally from the stockholders supporting the proposal to split Dimon’s two roles. According to the New York Times, “the ability to get real-time voting information is crucial for both Wall Street firms and the shareholders sponsoring proposals. A losing side may decide to pour more resources into its campaign, making additional calls or send additional correspondence to shareholders.” For years, Broadridge, a firm paid by corporations to tally their shareholder votes, gave the same information to both the managements and the proposal sponsors. Nearly two weeks before the end of the vote at JPMorgan, Lyell Dampeer of Broadridge was called by an employee of the Securities Industry and Financial Markets Association, Wall Street’s lobby group, requesting that Broadridge cut off the access of stockholders sponsoring proposals to the information. Executives at “some banks” were concerned, according to the New York Times, “that shareholder groups were leaking early vote tabulations.” Never mind that a CEO might ever have an incentive to do likewise. SIFMA and Broadridge are hired by the banks rather than their stockholders. “We act at the behest of our clients,” Dampeer said, so if JPMorgan’s CEO does not want his opposition to have vital information on the voting, he can cut them off using the financial sector’s lobbyist as a messenger. Put another way, the election was not fair. It was like one in Belarus, Iran, or Cuba rather than the E.U. or U.S.

“If they aren’t providing results to one side, they shouldn’t give it to the company,” said Brandon Rees, acting director of the A.F.L.-C.I.O. Office of Investment. William Patterson, the executive director of the CtW Investment Group, which represents union pension funds and owns six million shares in JPMorgan, said that when deprived of the initial tallies, shareholders were at the whim of management. “If you go in blind,” Mr. Patterson said, “you can’t really make an informed case to management” at the annual meeting about voting results “and hold them accountable.” But that is precisely the point; a CEO who chairs the board charged with holding him or her accountable will naturally resist accountability even from the owners of the company.

In terms of conflicts of interest, Broadridge was in one due to its roles as running the election and being a client of one of the two parties. If Dimon or any of his directors was involved in getting Broadridge to cut off the opposition from the tallies, this too would be yet another conflict of interest. In fact, for the bank itself to take the side of its management on a decision to be made by the bank’s owners involves the bank itself in a conflict of interest. The New York Times reported that “(b)ehind the scenes, JPMorgan has been working to persuade shareholders to support having [Dimon] keep both the chairman and chief executive titles.” In yet another conflict of interest, Dimon’s management cadre and directors on the bank’s board campaigned for each other directly in what can be characterized as a cozy relationship. Because a board is accountable to the stockholders rather than the management that it hires, colluding with the incumbent management when such collusion is itself at issue before the stockholders could mean that directors are working against the stockholders or at least manipulating or obstructing their choice.

After two shareholder advisory firms issued statements recommending the split due to questions about the independence and qualifications of several board members, directors and executives went into overdrive contacting major stockholders. The board put out a statement strongly urging stockholders to retain its chair even though he would still be the bank’s CEO. Two directors, Lee Raymond and William Weldon, went as far as to write a seven-page letter urging the stockholders to oppose the split. The “most effective structure” for the bank is to have Dimon “serving as CEO and chair. . . . It would be a mistake to change it now.” Dimon’s directors were acting as though they were looking out for the bank (and thus the stockholders) rather than simply doing Dimon’s bidding. Not only would it be a mistake, the two directors assert in the letter, a vote to permanently bar the same person from serving concurrently in both capacities “could be disruptive to the company and is not in shareholders’ best interests.” Stockholders reading the letter could have caved into the manipulation in utter panic unless they recognized the directors’ more immediate incentive to manufacture a doomsday scenario. Because of that incentive and the directors’ fiduciary duty to the stockholders, the directors’ two roles put them in a conflict of interest.

Whether he realized it or not, Dimon had his own conflict of interest in campaigning for himself and even for the incumbent directors. Perhaps in a quid pro quo, he told an audience of technology investors toward the end of his campaign that the board “should be applauded." He also said he didn't think any changes were necessary to the bank's board or its current structure. In other words, he didn’t think he needed to give up the chairmanship. The week before, he had already “upped the ante” by letting it be known that of the downsides to a vote relieving him of the chairmanship, “one thing would be I might leave.” He might as well have said he would take all his marbles and stomp away mad. Such is the attitude in having to have it all. Besides holding himself ransom to manipulate the stockholders rather than respect their independent decision, he was implying that if he couldn’t control the board whose main function is to hold the management (including the CEO!) accountable, he couldn’t do his job. It is as if he were saying, “Don’t be concerned about any conflict of interest in me being both chair and CEO because other things, such as me retaining both roles or even staying at the bank, are more important.”

               Jamie Dimon, CEO and Chair of JPMorgan Chase.  The duality of roles can benefit him both personally and institutionally. NYT

It is common for joint CEO/Chairs to maintain that it is necessary for the CEO to have all the reins, lest there be a power-struggle. Years ago, I asked Mike Armstrong, CEO and chairman of ATT before his broadband strategy failed, why he opposed having someone else as chair of the board. He replied that he needed all of the authority for his broadband strategy to be implemented. “The buck has to stop with me for me to complete the broadband strategy.” Similarly, appearing before the U.S. Senate in June 2013, Dimon said the "buck stops with me." That expression comes from President Truman even though he shared power with, and was restrained by Congress and the U.S. Supreme Court. In contrast, Armstrong and Dimon were assuming that complete control is requisite to accountability being possible.  “With a separate chair,” Armstrong told me, “the resulting strategy might not be all mine, so it would not be clear who is responsible should the strategy not succeed.” The fallacy invalidating this statement is that a chair and CEO occupy the same turf.

Commenting on Dimon’s dual roles at JPMorgan, Robert Benmosche, CEO of the infamous bailed-out AIG, said on CNBC in May 2013 that having another person chairing the board would make power-struggles more likely. “People in the organization would naturally go to mom or dad.” Benmosche was assuming that a chair and CEO occupy the same turf—that both come up with the strategy and therefore compete with each other.

The relation between a chair and CEO is vertical, not horizontal. Rather than being “mom and dad,” the chair of the board that holds the CEO accountable is like a parent and the CEO is like the child. It follows that the two roles are fundamentally (i.e., qualitatively) different, rather than overlapping a lot. Even though a CEO can propose a broad strategy to the board, the top manager is in charge of implementing, or managing, the broad direction set by the board. Put another way, the board sets the general direction and the CEO sets about setting the course in terms of business strategy. Just as the CEO is not rightfully to be held responsible for the general direction, the board can rightfully hold the CEO accountable for implementing the broad strategy within the general direction set by the board. A CEO being held accountable by a board chaired by another person is vested with sufficient authority to implement strategy and thus can be held accountable by the board (including its chair) for it. Similarly, the stockholders can hold their board’s directors accountable for the effectiveness of the general direction even though the chair is not also the CEO and thus does not implement the strategy.

Whether from a bloated or arrogant sense of entitlement or a fear of not being able to perform well enough or be fairly evaluated otherwise, insisting on being both CEO and chair of the board that holds the management accountable involves a conflict of interest, which, if exploited, is not in the interest of stockholders. “There’s a fundamental conflict in combining the roles of chairman and C.E.O.,” Anne Simpson, director of corporate governance at Calpers, said. One of the main tasks of a corporate board is to oversee the corporation’s management. If the CEO, who heads the management, is also heading the board tasked with overseeing management, the CEO is institutionally and personally tempted to influence the board to go easy on the management. Re-nominating and actively campaigning for the directors could be the quid pro quo that completes the tight, cozy circle of the dominant board-management coalition.

From the standpoint of systemic risk, a board easing up in holding the management of a bank too big to fail accountable or even looking the other way represents a danger to the entire financial system and even the global economy. “It’s all thrown into stark relief when you’re dealing with a company that’s too big to fail,” the New York Times observes. Lest this assertion seem like fear-mongering, JPMorgan had lost $6.2 billion the year before on a risky trade mislabeled as a “hedge” against risk. In its report, Institutional Shareholder Services (ISS) cites “material failures of stewardship and risk oversight” by the board and upper management. Glass, Lewis points its criticism at the directors on the board’s risk policy and audit committees. “We believe that shareholders may justifiably expect that the audit committee of one of the nation’s largest banks, and one of the largest participants in the global capital and derivative markets, should act to ensure that the bank’s traders cannot obfuscate the values of their positions with as much ease as evidently occurred in the London Whale matter.”  The report raises questions about the independence of several board members. Accordingly, the reduction in Dimon’s compensation should not be regarded as a sufficient remedy and safeguard.

The Wall Street Journal reports that the board of JP Morgan Chase reduced the compensation of James Dimon by 50% for 2012 because of the “London Whale” trading loss. In its decision, the board stressed that he bore “ultimate responsibility” for the trading failure. Dimon himself referred to the trading loss as “one huge embarrassing mistake.” Accordingly, the board set Dimon’s pay for 2012 at $11.5 million, down from $23.1 million in 2011. This decline was in spite of the bank’s record profit in 2012 of $21.3 billion. For the 4th quarter, the bank reported net income of $5.69 billion, up from $3.73 billion in the last quarter of 2011. The rationale for the reduced compensation lies in the fact that 2012’s profit would have been even more had the $6.2 billion loss not occurred.

Moreover, oversight, which failed in regard to the trade, is closer to the CEO’s function than is the change in profit. For example, a CEO should not receive a bonus for profit due to circumstances behind the firm’s control. Additionally, the board also delayed the vesting on 2 million stock options that had been awarded to Dimon in January 2008, pending “remediation relating to the CIO matter.” An internal investigation had found that the CIO unit’s judgment and handling of risk management were poor in regard to the trading loss. Dimon bore oversight responsibility on that unit. It is unlikely, however, that delaying vesting would matter at all to an already-rich person.

It is difficult to see how receiving $11 million represents a hardship. Were an American CEO’s compensation ten or eleven times that of the average worker, rather than over three hundred times, perhaps reductions in compensation would have greater impact on an executive’s subsequent performance. Moreover, the linkage between cutting the CEO’s compensation and achieving systemic improvement in the CIO unit is indirect at best. To have more confidence that such wholesale change will be accomplished, changes in the corporation’s governance are also necessary. The magnitude of the turnaround in terms of the culture, policies, processes and personnel dwarf what a compensation committee can do.

JPMorgan’s stockholders can ill-afford a compromised board protecting an entrenched management rather than the stockholders’ interests. Because part of the question before the stockholders is whether their board is independent of the management, allowing that board to serve as the ultimate decider on the split is problematic due to the conflict-of-interest. The bank’s corporate governance “basic law” is flawed, therefore, in that the shareholder vote on the split (and even on specific directors!) is nonbinding. Although the Wall Street Journal notes that directors “could face pressure to act if more than half of all shareholders want the positions divided,” relying on pressure—particularly if the board has been contaminated—is naïve and woefully unfair to the stockholders’ property rights. Whether on a plurality or majority basis, stockholder votes should be binding on the board and management—both of which are the agents of the stockholders (e.g., fiduciary duty).

It is astonishing (and telling), therefore, that Dimon said that whether or not to split his two roles is “a policy decision” that should be made by the board rather than the stockholders. His stance assumes that the board would be acting in the stockholders’ interest rather than that of the management. With Dimon serving as chair of that board, the board’s decision would likely be made in his interest rather than that of the stockholders or even the bank itself.

Whereas Dimon was likely contending that the “policy decision” should be made by the board looking after the stockholders’ interest rather than by the stockholders themselves because the directors have more business or banking expertise, I contend that managerial expertise is not requisite to evaluating proposed changes to a system of corporate governance. That is to say, the business judgment rule should not trump property rights on corporate governance proposals. Governance is not management. Political theory and judgment are more salient in governance, hence business or managerial expertise does not enjoy the prerogative.

In the sphere of public governance, constitutions (i.e., basic law) are not written as statutes. Therefore, citizens need not be lawyers in order to make a judgment on a proposed constitutional amendment. When amendments are written in legalize, as was the case in Florida’s 2012 election, the fault lies with the legislators who wrote the amendments rather than the voters who could not understand it. That is, the use of technical writing does not give lawyers the prerogative in the matter of adoption.  The voters would rightfully object were lawyers to demand that they should vote on the electorate’s behalf, for the good of the electorate. The right to vote trumps a lawyer’s expertise even if legalize is erroneously used on questions put on the ballot.

In terms of corporate governance, writing a proposal to be put before the stockholders in technical business language does not justify having the directors or executives rather than the stockholders make the decision. Being of “basic law,” governance proposals are not so esoteric. Even if they were, the increased role of institutional investors as activist stockholders deflates Dimon’s self-serving argument that the board knows best how to decide a “policy” on corporate governance. The fact that ISS recommended voting against three of the bank’s eleven directors while Glass, Lewis urged stockholders not to vote for six of the directors suggests that the two firms had analyzed particular directors from the standpoint of independence rather than merely saying making a broad statement, such as that the board lacks sufficient independence to act on behalf of stockholders rather than the management.

Even with a board composed of corporate governance experts, decisions on a corporation’s system of governance are rightfully the prerogative of the owners rather than their agents, even if those agents would make better choices on behalf of the stockholders. To subvert a principal-agent relationship because an agent has expertise puts effectiveness above rights. Add in the conflict of interest and upholding the rights becomes even more important. Until these principles are grasped by investors and business managers, the practitioners will continue to have an unwarranted advantage over the owners.

 

Sources:

Susanne Craig and Jessica Silver-Greenberg, “Small Firm Could Turn the Vote on Dimon,” The New York Times, May 7, 2013.

Dan Fitzpartrick and Kirsten Grind, “Amid Vote, Dimon Has Considered Departure,” The Wall Street Journal, May 11, 2013.

Susanne Craig and Jessica Silver-Greenberg, “Shareholders Denied Access to JPMorgan Vote Results,” The New York Times, May 15, 2013.

Dan Fitzpatrick, Robin Sidel, and Kirsten Grind, “Dimon Makes His Case,” The Wall Street Journal, May 17, 2013.

Dan Fitzpatrick, Julie Steinberg, and Joann Lublin, “Dimon Strengthens Grip at J.P. Morgan,” The Wall Street Journal, May 21, 2013.

 









 

 

 

                    
 

 

President Obama as Chief Executive? Too Busy Leading and Legislating to Catch the IRS

Has the presidency become too big for one person? This question was salient in the 1970s, as Americans endured Nixon’s Watergate plight, Ford’s frustrations with stagflation, and Carter’s failure to free the American hostages being held in Iran. Meanwhile, none of those presidents were able to take on OPEC (an Arab Oil Cartel). Reagan’s answer was that big government, not an overwhelming office, was the problem. Leaving aside the ideological question of whether the U.S. Government had indeed grown too big (especially relative to the state governments), I contend that occupants of the White House have serially misunderstood the nature of the office. In short, the presidents have allowed their efforts in partisan leadership to crowd out being the chief executive of the executive branch. I suspect that the explanation involves a mix of self-centeredness and simply wanting to shirk the boring stuff for more exciting activities.

 

To preside literally means to stand before. In the Constitutional Convention in 1787, Ben Franklin referred to the proposed office as sitting “in peaceful Council … merely to preside over our civil concerns, and [to] see that our laws are duly executed” (Madison, Notes, p. 55). Referring to the first role, which I take to be that of presiding, Governeur Morris stated on July 19 in convention that the President should be “a firm guardian of the people and of the public interest” (Madison, Notes, p. 324). In this respect, the office of the American presidency is thus geared to looking over the viability of the whole, leaving the partisanship and legislating to the legislative branch. When these two are not left to the Congress (the veto being originally intended to protect the whole rather than for ideological purposes), the credibility of presiding is compromised. Further, the administrative tasks in seeing that “our laws are duly executed” are unduly delegated or simply ignored.

 

In presiding, the president stands for the Union, which includes protecting its system of governance at the macro level and the Union itself, whether from internal dissolution (e.g., Lincoln) or foreign invasion (e.g., FDR). The Presidential leadership that is most credible is at this “high altitude” level. Because the office is not primarily oriented to partisanship on every single issue before the Congress, partisan leadership, such as on a garden-variety issue, is ultimately bad for a president both in terms of credibility and opportunity cost (i.e., the value of tasks closer to the office  that are crowded out).

 

George Washington can be cited to support the thesis that the office is oriented to flying above all but the highest storm clouds. The first president had both Thomas Jefferson and James Hamilton in his cabinet.  Listening to the two men debate, the presider could discern where the national interest lay rather than risk ideological group-think oriented to using the office to push an agenda. President Jackson was oriented to the good of the whole rather than a partisan ideology when he opposed Congress funding roads entirely within a given state (Missouri) and yet sent troops to South Carolina after it passed the Nullification Acts that purported nullified federal laws that hurt the state’s interests. It is not clear if the president was a federalist or an anti-federalist, as his focus was on keeping federalism in balance because that would support the viability of the Union.

 

The results of a 2010 focus group reported by the New York Times indicated that Americans wanted a president who resists the temptation to engage in partisan fighting. They wanted a leader who would stand for things on which most Americans agree, such as that American society should be more civil. Such leadership is oriented to a vision of the whole that transcends partisanship. For example, Barak Obama could have run in 2008 explicitly as a multiracial (rather than black) candidate capable of personifying what America was rapidly becoming: a true melting-pot wherein multiracial persons are seen as the leading wave of the future. Taking a partisan stand on virtually every issue that come out of Congress so as to have as much as possible his way undercuts the credibility of “personification leadership” because people on the other side of a given issue will resist accepting the president as personifying anything involving themselves. In other words, Obama’s political opponents will not buy into any America that he personifies—period.

 

As a general principle, partisanship undercuts presiding. Paradoxically, a president wanting to maximize his influence on every issue winds up undercutting his influence that is most in line with the design and nature of his office and thus effective. In wanting so much to go his way, a president’s ego obstructs his performance on tasks that only he is in a position to accomplish. Lost in the backwash of partisan spit is not only presiding, but also executing the law as the chief executive. It is counterintuitive to conclude that a sort of presidential leadership (i.e., the partisan or ideological variety) is bad because it crowds out the more fitting administrative role. Properly understood, (presiding) leadership applies to the presidency without crowding out the administrative tasks in holding agencies accountable. Sadly, presidents typically try to get involved in as many issues as possible—hence the office appears to have grown too cumbersome for one person.

 

Joe Hagin, George W. Bush’s deputy chief of staff, observed while still in office that there “was much less time [under the second Bush] to catch your breath during the day.” A constant juggling of issues—from wars down to cleaning up after hurricane Katrina often taking place all at the same time—had exhausted the White House staff. “There’s only so much bandwidth in the organization,” Hagin admitted.  “Can any single person fully meet the demands of the 21st century presidency?”  Doris Goodwin has argued that the growth in the number of things expected of the president has expanded exponentially since WWII. “The President’s inner circle can become stretched by the constant number of things labeled ‘crises’ that land on his desk.” Just because the media labels some issue as a crisis in order to increase viewership does not mean that the issue measures on the “presiding” scale. Surely the Presidency, being intentionally designed as one person rather than a presidential council, was not initially intended to micromanage every issue in public discourse. The proliferation of news sources has increased the pressure on the President to weigh in on more things. Meanwhile, his administrative tasks are neglected even more.

 

President Obama delivered 57 speeches in October, 2010 alone; he had seven speechwriters at the time. It would be interesting were someone to analyze those speeches to see how many pass muster in terms of presiding rather than being partisan on topical issues. The opportunity costs of getting into every issue in hopes that each one will go the way he wants include not only foregone presiding opportunities but also administrative lapses in executive branch agencies that the chief executive and his immediate staff could have caught and rectified at an early stage.

 

In May 2013, President Obama claimed that he had learned that the IRS had been targeting conservative groups for audits “only with the rest of you.” This statement “drew criticism,” according to the Wall Street Journal, by “focusing attention on his management style and whether he has kept himself sufficiently informed about the agencies under his authority.” I suspect that the president enjoys giving partisan speeches more than overseeing many agencies. In other words, he allowed the time-expansive sort of (partisan) presidential leadership to eclipse his administrative duties. Even the American people tend to view the presidency as a leadership rather than administrative position—so the president gets away with trying to get as much as possible to come out his way, politically.

 

The problem can be viewed as one of self-discipline. While in the U.S. Senate, Sen. Obama did not enjoy the committee hearings, but attending them was part of his job. Whereas in the Senate his leader, Harry Reid, could hold him to task on the monotonous parts of the job, no such authority in the White House exists over a president. To do more administratively as chief executive of the executive branch agencies, Obama would have had to rely on his own self-discipline, which appears to be in short supply. In regard to the partisanship in the IRS, it could be asked why neither the president nor his White House staff had caught the problem in their administrative capacity as the conservative groups were being targeted. Perhaps the president had been too busy giving campaign speeches or negotiating with Republican legislators on legislative proposals.

Sources:

Daniel Stone, “Hail to the Chiefs,” Newsweek, November 22, 2010, pp. 30-33.

Matt Bai, “Voter Disgust Isn’t Only About Issues,” The New York Times, October 6, 2010.

Peter Nicholas, “Obama’s Counsel Was Told of IRS Audit Findings Weeks Ago,” The Wall Street Journal, May 19, 2013.

James Madison, Notes in the Federal Convention of 1787. New York: Norton, 1987.

 

 

 

Global Warming Reaches Critical Threshold

Sources:

Background Picture: hherbzilla on Flickr
Stats and "before/after" picture: Brian Merchant, "This Is Life in a 400 PPM World," Motherboard, May 16, 2013.

See related essay: "Half of the American Population Disagrees with 97% of Climate Scientists on Global Warming."

Hollande Proposes Economic Government for Euro-Zone: Muddying the Water?

At a press conference marking French President Francois Hollande’s first year in office, the powerful head of the large E.U. state called for an economic government for the euro zone.  One might be tempted to ask, what exactly is an economic government? By definition, a government is a political entity. Show me a government without politics and I’ll pack up and head to the Himalayas for a life of other-worldly contemplation. What, pray tell, is an economic government exactly?

           President Francois Hollande of France proposing an economic government for the euro-zone. What exactement is an economic government?    Source: Reuters

In his remarks, Hollande proposed that the euro-zone government would have its own budget, the right to borrow, a harmonized tax system, and a full-time president. Continuing its reportage, Reuters adds, “Hollande said a future euro zone economic government would debate the main political and economic decisions to be taken by member states, harmonize national fiscal and welfare policies, and launch a battle against tax fraud.” In his own words, "ce gouvernement économique débattrait "des principales décisions de politique économique à prendre par les Etats membres." Debating political rather than only economic decisions would seem to render the proposed government both political and economic, rather than merely economic. But would it be a government at all?

Debating decisions that would be “taken by member states” (à prendre par les Etats membres) suggests more of an alliance or cartel than a government. If the European Parliament is involved with only representatives from euro-zone states voting, the decisions would not just be taken by the state governments. The same holds if the European Commission is involved.

Generally speaking, one of the things that the E.U. suffers from is linguistic confusion. By this I don’t mean bad translations. Rather, politically charged terms including federalism, union, member, and network are bandied about rather carelessly at times and with serious political agendas at other times. Government being applied to the E.U. is another such word. In his remarks, Hollande seems to have been trying to tweak the word by specifying it as economic only even though political decision would be debated in the proposed government. In trying to have it both ways—an economic regime and a political union—Hollande was being political at the expense of that which he proposed. Dancing around terms—even changing their respective meanings—in order to get something past detractors who pay too much attention to words comes at a price  in terms of E.U. institutions whose respective natures and proper functioning are ambiguous. This is perhaps the real crisis facing the E.U.—one of identity—and state leaders such as Hollande are not exactly clearing up the muddy water.

Sources:

Mark John and Ingrid Melander, “France’s Hollande Urges Euro Zone Government,” Reuters, May 16, 2013.  

"Conférence de François Hollande : les principales annonces et declarations," Le Huffington Post, May 16, 2013.

Half of the American Population Disagrees with 97% of Climate Scientists on Global Warming

Thomas Jefferson and John Adams concurred on the following preference—namely, a natural aristocracy of virtue and talent over the artificial sort of birth and wealth. Talent here is not merely skill, but also knowledge. Hence the two former U.S. presidents agreed that citizens ought to be given a broad basic education in free schools. The corollary is that as a citizenry lapses in virtue and knowledge, decadence will show up in public discourse and consequently public policy. If kept unchecked, the tendency is for the republic to fall.

Therefore, as governor of Virginia, Jefferson proposed a Bill for the More General Diffusion of Knowledge in 1779. His rationale was that because even “those entrusted with power” who seek to protect individual rights can become tyrants, popular education is necessary to render a republic secure. Jefferson’s hope was that by teaching “the people at large” examples of despots in history, the electorate would be more likely to recognize despots in their own time and throw the bastards out on their noses. As for those whom voters put in public offices, Jefferson believed that “laws will be wisely formed, and honestly administered, in proportion as those who form and administer them are wise and honest.” Hence, “those persons, whom nature hath endowed with genius and virtue, should be rendered by liberal education worthy to receive, and able to guard the sacred deposit of the rights of their fellow citizens.” This is why, beginning at around 1900, law schools in the American states began to admit applicants to the undergraduate degree in law (LL.B. or J.D.) who had already earned an undergraduate degree in the liberal arts and sciences. It was not as though the undergraduate degree in law had been promoted to graduate status.

Having had largely self-governing, popularly-elected colonial legislatures for much of the seventeenth century, the nascent American republics would stand on the two pillars of virtue and talent (including knowledge) instilled in the self-governing peoples themselves as well as their elected and appointed public officials. It is said that the only constant is change, as in the extent to which an electorate is virtuous and generally knowledgeable, as well as in the related rise and fall of republics. One notable example is ancient Rome, which went from being a republic to a dictatorship under the purported exigencies of war. Lest the rise and fall of republics seems a bit too dramatic to be considered realistic, I offer the more modest thesis that a decline in virtue and knowledge among an electorate renders the public policy increasingly deficient in dealing with contemporary problems. The matter of climate change is a case in point.

According to a study at Yale in April 2013, Americans’ conviction that global warming was happening had dropped by seven percentage-points over the preceding six months to 63 percent. The unusually cold March—quite a reversal from the previous March—explains the drop, according to the poll’s authors. The cold may actually have resulted from a loosening in the artic jet-stream southward—like a rubber-band whose elasticity has been compromised—due to more open water in the arctic ocean and thus less temperature differential in the air. Even so, only 49% of Americans believed that human activities were contributing to global warming. In fact, only 42% of Americans believed at the time that most scientists had concluded that global warming is really happening. Thirty-three percent of Americans were convinced that “widespread disagreement” exists among scientists.

In actuality, a study showed of more than 4,000 articles touching on human-sourced climate change, 97% of the scientists having written the articles conclude that human-caused change was already happening. Less than 3% either rejected the notion or remained undecided. “There is a gaping chasm between the actual consensus and the public perception,” one of the study’s authors remarked. “It’s staggering given the evidence for consensus that less than half of the general public think scientists agree that humans are causing global warming. This is significant,” the author concludes, “because when people understand that scientists agree on global warming, they’re more likely to support policies that take action on it.” Going back to Jefferson and Adams, ignorance among the electorate in a republic can be sufficient to divert enough political will that legislation sufficient to deal with the problems facing that republic is thwarted.

It is likely that some of the apparent ignorance on global warming could actually be partisan aggression. If President Obama favors policies predicated on the assumption that human-sourced global warming is underway, his support could be enough for some Republicans to hold firm in their denial of even other-sourced global warming. In holding knowledge hostage to score cheap partisan points, those citizens are not evincing much virtue. James Madison in particular would say that the partisanship itself should be counted as a vice.

If Jefferson and Adams were correct that a virtuous and knowledgeable citizenry is vital to the continuance of a republic, the extent of ignorance and partisan vice related to global warming in spite of the nearly unanamous scientific conclusion and the huge stakes involved may suggest that the American republics and the grand republic of the Union may be on borrowed time (and money). Moreover, that the ignorance and vice pertains to global warming enlarges the implications to include the continuance of the species. That is to say, a virtuous and educated species may be necessary for its very survival.

See this PSA on global warming: http://www.thewordenreport.blogspot.com/2013/05/global-warming-psa.html


Academic Sources:

Philip Costopoulos, “Jefferson, Adams, and the Natural Aristocracy,” First Things, May 1990.

Yale Project on Climate Change Communication, “Americans’ Global Warming Beliefs and Attitudes in April 2013,” Yale School of Forestry and Environomental Studies, 2013.

John Cook, Dana Nuccitelli, Mark Richardson, et al, “Quantifying the Consensus on Ahthropogenic global warming in the scientific literature,” Environmental Research Letters, 8 (2013) (2), pp.

Press Source:

Tom Zeller, “Scientists Agree (Again): Climate Change Is Happening,” The Huffington Post, May 16, 2013.

A "Banking Union" or Coordinated State Laws and Regulations?

A subtle though important difference exists between American and European federalism, each of which covers both the "kingdom" (i.e., early modern, now mostly republics) and "empire" (i.e., ancient and early modern, now usually huge federal systems) scales. So I am referring to federal systems like the U.S., E.U. and Russia (and U.S.S.R), rather than to federal systems within any of their respective political subunits (e.g., Belgium, the Netherlands, and Germany). The difference between the E.U. and U.S. that I discuss here can be grasped by looking at the two competing proposals for federal bank regulation in the European Union. The crucial question facing the E.U. finance ministers concerns which system of government--the federal or state--should take the lead legislatively and in enforcement. Under one of the proposals, the regulations would begin as a broad directive formulated at the E.U. level. The state legislatures would then translate the general (i.e., shared) principles into statute law and hand enforcement over to state regulatory agencies.  With both federal and state legislative bodies involved, this type of coordinated federalism could be an improvement on the American model. The other proposal is more in line with that model, with E.U. legislative and regulatory bodies constructing the "banking union."  Although the motivations doubtlessly have much to do with money, the question of whether the E.U. will become more European or American is also relevant.

The "American-type" proposal, supported by Jörg Asmussen, Germany’s representative at the European Central Bank, favors “a single resolution regime, a single resolution fund, which is paid for by bank levies, and a single resolution authority.” In other words, the regime, fund and bank resolution authority would be at the E.U. level, just as the Dodd-Frank Act is implemented at the U.S. level rather than by the states in a coordinated fashion. Both cases include having money redistributed across state lines.

Because the state governments have relatively more power at the E.U. level than is the case in America, a large state such as Germany that would be paying out can be expected to object, and it has. Wolfgang Schäuble, Germany’s finance minister, complains that the proposal would require changes to the treaties that serve as basic law of the E.U. As if passing an amendment to the U.S. Constitution were not arduous enough, the comparable process in the E.U. includes referendums in some of the states that would hold the process up. The market will want stability before the treaties could be ratified by enough states in the "euro-zone," Schäuble argued.

 

      This picture depicts the distinctive European model of modern federalism wherein the state governments play a salient role in implementing (and modifying) federal law.   source: mapperywordpress.com

 

Accordingly, Schäuble proposed a more European approach to federalism. "Current treaties don't give enough foundation for a European restructuring authority," he told reporters. "You can do the same thing very well with a network of national authorities." What he had in mind is the directive, a legislative device at the E.U. level that sets a broad policy that the state legislatures put into more specific law. The policy language in the directive is supposed to result in states laws that are coordinated even if not directly. No such devise is known to the American Congress, which alone legislates federal law, and thus without particular regard to the differing circumstances of the several states. Even though Schäuble's proposal is more distinctively European, not all European officials are climbing aboard. 

Specifically, not everyone is convinced that changes to the treaties would be necessary for a so-called “banking union” to be legislated and run at the federal level. Jeroen Dijsselbloem, the Dutch finance minister, and European Commission economics chief, Olli Rehn, have pointed to the division of opinion over the issue of treaty change. According to the Wall Street Journal, Olli Rehn “said the commission, the EU's executive branch, believes the agreed elements of the banking union, including the common bank-resolution mechanism and fund, could be implemented within the existing legal framework but said legal experts were looking into the issue for a definitive answer.” In other words, the question of whether a single federal regulatory agency or multiple (coordinated) state regulators should be adopted depends at least in part on whether treaty changes would be necessary.

Of course, the government officials could decide to go for  a single banking regime rather than 27 coordinated regimes even though the treaty-amendment process would be slow and cumbersome. Schäuble’s stated point is that the extra effort could be obviated without sacrificing on the regulatory performance by choosing his proposal. His real point has been that the state of Germany does not want to contribute to a common bank-resolution fund that would involve German money being used to bail out inefficient banks in corrupt states, like Greece and Spain. So I suspect Schäuble would object to a federal banking resolution regime even if legal experts were agreed that no treaty changes would be necessary. Of course, at that point, he could simply point out that his proposal is less like American federalism, and he would instantly become the man of the hour in Europe.

In my view, the E.U. has been too obstructed by an excessive amount of power being held by the state governments at the expense of federal governing institutions. That German reluctance to pay for banks in poorer states could sink any "banking union" in the E.U. demonstrates just how counter-productive and contrary to the common good a state-centric federal system can be.

To be sure, increasing the involvement of the state governments beyond their role in the European Council to include legislating federal policy into more specific state law that reflects not only a state's particular context, but also  the general principles set in the directive at the federal level captures the distinctive benefit of federalism--namely, being united generally yet diverse locally. However, the danger facing the European project even after fifty years is that the preponderance of power lying with the state governments relative to federal officials and bodies not consisting of state leaders could ultimately result in dissolution of the Union. Schäuble’s proposal implies a fear of consolidation even though the opposite is much more likely, given where the center of gravity exists in the E.U. solar system.

Therefore, Schäuble's more "European" proposal would be preferable, both in terms of federalism and as an alternative to the American model, were the European state governments not already so powerful even at the E.U. level. Schäuble's proposal of having the state governments actively involved in legislating federal policy at the state level could provide a stronger, more integrated federal system than is the case in the U.S., whose states had already been nearly relegated to local matters. Of course were the Europeans to achieve more of a balance of power federally (including reducing the power one state to stand in the way of federal legislation), the European version of modern federal could be an improvement on the earlier American model.

Source:

Matina Stevis and Tom Fairless, “Euro Zone Grapples With Banking Union,” The Wall Street Journal, May 13, 2013.