After the $6 billion trading loss at JP Morgan, the U.S. Senate Permanent Subcommittee on Investigations issued a report raising the prospect of wider problems than that of a rogue lower-level trader. Specifically, the report suggests that executives at the bank “ignored warning signs and failed to alert investors about changes to its method for detecting risk,” according to the New York Times. That is, the bank had not been publically disclosing its risky trading, thereby misleading stockholders and regulators. Banks such as JP Morgan had been urging regulators to weaken the Volcker Rule in the Dodd-Frank Act of 2010 to allow banks to continue to engage in some risky proprietary trades.
For a bank’s management to have such power of information comes at the expense of not only the public interest (represented at least officially by regulatory agencies), but also property rights. That is to say, the lack of disclosure points in all probability to management having an excessive amount of power in the bank’s corporate governance. The board, in other words, has in all likelihood been giving the management too much power and leeway, even over the board itself.
A corporation’s management already has the advantage of being in the center of information, which can be used as leverage at the board level and in negotiating regulations with regulators. For the CEO to also chair the very board whose primary function is to hold the management accountable gives the management too much of an advantage at the level of corporate governance. That this problem is systemic means that public policy prohibiting the duality of roles is justified. Rather than leaving it up to the particular company, the systemic imbalance of power in favor of management can be corrected by a law obviating the imbalance and even perhaps giving the property owners (i.e., stockholders) the advantage.
Ben Protess and Jessica Silver-Greenberg, “Senate Report Said to Fault JPMorgan,” The New York Times, March 4, 2013.