More Fascism in the Stock Market

Company "owners" that don't care if the business succeeds.

The Economist recently published an article about JPMorganChase's recent annual meeting which looks on the surface like an ordinary business-practice report with some added spice from shareholder conflict.  In reality, it's revealed something much more profound and much more hazardous to our economic future.

When A Dictator Is A Good Idea

JPMorganChase (JPMC) is one of the world's largest, richest, and usually most profitable banks.  It is run by one Jamie Dimon who is such an extraordinarily successful leader that we wrote a whole series featuring him as an example about how dangerous it is to have a massive business depend on one single genius.

One reason Mr. Dimon is able to be so successful is because he is both CEO of JPMC and also chairman of the board; he is thus his own boss and cannot be fired barring a shareholder revolt.  He doesn't have to answer to anybody and can do as he thinks best without needing any more justification than profits, which he churns out in abundance.

It also means there's no doubt about who's in charge - it's Mr. Dimon.  One of the deadliest problem in running large organizations is division of command - the troops won't know the direction to go if they aren't sure whom to follow.  With Mr. Dimon being king, mayor, and both houses of Congress, there's no possibility of any such confusion.  You do as he says or you're gone.

Having the CEO and chairman of the board being the same person is usually bad corporate governance, however, precisely because it allows the leader unchecked power.  It's like the business equivalent of a dictator - if you happen to get a really good dictator you'll be far more effective than suffering with the shambles of a democracy, but since most dictators turn out to be awful it's a poor risk.  JPMC just happened to get lucky.

So, to sum up: In general, it's a bad idea to have one guy be both CEO and chairman.  In the specific case of JPMC, it's worked extremely well for the shareholders who are, after all, the ultimate owners of the company.

By the Book or By the Numbers?

The question under debate at JPMC's annual meeting was, should the CEO and chairman jobs be split despite the fact that Mr. Dimon has proven himself eminently worthy?

Although advocates of the motion to split Mr Dimon’s roles insisted that they were not out to get him, he was clearly the main focus of the debate. A strong and decisive manager, Mr Dimon has shaped JPMorgan’s strategy and thus its remarkable success. But his willingness to criticise the chaotic regulatory structure imposed on banks after the financial crisis has exposed him to political retribution. [emphasis added]

Wait a minute, political retribution? Aren't investors, particularly institutional ones, supposed to care about financial returns above all else?

They are required to do so by law, but not all of them follow the law, as it happens.  The Economist explained the reason why:

Mutual funds and shareholders with interests closely tied to returns overwhelmingly supported Mr Dimon, fearful that a vote in favour of the split would weaken his authority or, worse, precipitate his departure... The motion was sponsored mostly by entities with a more political bent: two municipal pension funds, New York City’s and Connecticut’s, and the American Federation of State, County and Municipal Employees, a union of public-services employees.

What's the difference between these two groups?  Ordinary mutual funds live and die by returns, that is, the money they earn on whatever trades their managers make.  There are thousands of mutual funds out there, all very much the same from the point of view of the normal non-Wall-Street person.  The only way to pick from them is by the size of their fees and their record of returns.  Mutual funds with a history of good returns grow and make their founders rich.

Municipal pension funds are an entirely different beast.  In theory, they're also supposed to be about maximizing returns because they pay out money each month to retirees and it has to come from somewhere.

In practice, though, there's little incentive for municipal pension funds to care much about making high returns.  The retirees have no choice about being in the fund since it's part of their union contract and usually run by the union, which in turn they're required to join under the terms of their employment.

Technically, though, neither the union nor the the retirees share in any risk of the fund not having enough money: the pension is an obligation of the underlying government organization (city, state, etc.) and has to be paid regardless of what happens to the fund.  The retirees will always be paid unless the city declares bankruptcy, but that's only happened a handful of times up to now and isn't treated as a serious possibility by union officials.

So if the union-hired fund managers don't care much about the returns, they can use their financial power to play political games.  Sometimes they'll try to force out executives who are opposed to unionization of the underlying company, even though they know perfectly well that unionization will reduce profits.  A large multisector union can expect to gain more money in newly forced union dues than it loses in lost investment returns.  In the case of government pensions, losses will be made up by the taxpayer!

In effect, union-operated pension funds are, like most modern union activity, just another way to force taxpayers to pay for political activity they probably oppose.

The Wolf in the Henhouse

Shareholder activism has become much more common in recent years, and when it's exercised to get rid of incompetent management, that's all to the good.

The problem arises when one group of shareholders activists have goals that are opposed to the interests of the rest of the shareholders.  The union pension funds would rather get rid of a prominent opponent of more (unionized) government regulations than make money, but the whole point of the rest of the shareholders is to make money.

We're seeing more and more of this all across leftism.  Environmentalists buy a few shares in oil companies and try to use this "ownership" to hamstring the whole reason the oil companies exist.  College students try to force universities to end profitable investments in Israel, weapons firms, or tobacco companies that subsidize their tuition, because they figure the money is coming from the Bank of Mom and Dad or Uncle Obama anyway.  We saw the ultimate example a few years back when Barack Obama took over GM and abused the bankruptcy laws to gift large chunks of value to his union allies.  The taxpayers lost over $9 billion on that "investment", but for Mr. Obama and his allies, it worked out gloriously.

Capitalism is the most powerful force for enabling a better life for the common man that's been discovered in all of history, but it has a few basic requirements.  One of the most fundamental is that the people involved in a business want better lives, as represented by making more money.  If you have a company owned by people who do not care about making money, or worse, who actively oppose what the company does, it isn't going to be very successful.

Unfortunately, we now have a government that cares nothing about letting people make money when it isn't actively opposing it, and a horde of leftist activists who feel the same way.  More and more, our economic system is not capitalism but fascism.

Petrarch is a contributing editor for Scragged.  Read other articles by Petrarch or other articles on Business.
Reader Comments

<i>The taxpayers lost nearly $100 million on that "investment"</i>

The link you gave shows a loss of over $9 billion, not $100 million. The website misplaced its commas.

June 7, 2013 1:45 PM

Good catch! The article has been amended. Raises questions about the credibility of that web site, too. Here is an MSM article suggesting that the loss will be around $5 billion.

Still pretty bad.

June 7, 2013 1:56 PM

The end of this article is, as expected, exactly right. I'm waiting for people to pop out of the woodwork to use that magic "F" word in ways that make no sense and try to assign it to crazy right-wingers.

June 9, 2013 12:26 PM
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