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Looking for conflict in all the wrong places

"Bart Naylor" "Financial policy reform"By Bartlett Naylor and Taylor Lincoln

Congressional interrogators at a June 5 hearing will attempt to show that private consulting firms that advise institutional shareholders on proxy votes are riven with conflicts of interest. One advisory firm (gasp) is indirectly owned by a Canadian pension fund. Imagine: Canadians telling Americans how to vote in corporate elections.

The context for this ersatz hunt for justice, according to the House financial services subcommittee staff memo, was this spring’s campaign over a ballot resolution that would have required JPMorgan Chase CEO Jamie Dimon to surrender his other title as chairman of the board. The proxy advisory firms recommended that shareholders vote to split the CEO and chairman position at JPMorgan.

A cynic might dismiss this hearing as a public castigation of private firms with the temerity to challenge Jamie Dimon and to suggest improvements at JPMorgan, which is the biggest of the nation’s “too big to fail” banks, and, incidentally, one of the biggest campaign contributors to members of Congress.

Here are the real conflicts that members should address to the witnesses who were invited to testify (none of whom, by the way, work for proxy advisory firms).

1. In the JPMorgan proxy vote, the company established a “war room” and spent an estimated $5 million of the company’s money – shareholders’ money – to contest the resolution to split the CEO and chairman roles. JPMorgan’s shareholder-funded campaign was the equivalent of permitting incumbent politicians, but not challengers, to spend taxpayer money to finance their election campaigns.

Meanwhile, AFSCME, Hermes Fund Managers, New York City Pension Funds and Connecticut Retirement Plans and Trust Funds –  which proposed the resolution for the independent chairman – had to spend their own money. Their expenses likely amounted to little more than paying for a flight to Tampa, a hotel room and some staff time.

2. Mutual funds, such as giants Vanguard, Fidelity and T. Rowe Price, provide a means for small investors to hold classes of stocks (growth, international, small cap, etc.). These funds should represent the interests of small investors. But firms such as T. Rowe Price also manage accounts, such as 401(k) plan management, for corporations themselves. Voting “against” management, such as at JPMorgan, isn’t good marketing. While T. Rowe Price supported stripping Wells Fargo CEO John Stumpf of his role as chair, it supported Jamie Dimon. A committee concerned about conflict of interest would ban institutional investors from also managing accounts of the corporations on whose proxy votes it advises. Mutual funds with business ties are less likely to support shareholder proposals, according to Georgia State researcher Rasha Ashraf. [See here, here and here.]

3. During the JPMorgan proxy campaign, AFSCME retained a firm named Broadridge (a private firm that collects proxy votes) to give it updates on how the vote was going. But 10 days before the election deadline, an industry trade association reportedly persuaded Broadridge to stop issuing updates to AFSCME. “They have changed the rules in the middle of the game and it has created an unfair advantage,” said Michael Garland, who heads corporate governance for New York City comptroller John Liu. “It’s like playing a game where only the home team gets to know the score.”

4. The whole framework surrounding shareholder proxy votes is stacked against shareholders. Harkening a Soviet election, shareholders may vote only for the directors nominated by the incumbent board. Congress mandated a modest reform (Dodd-Frank Section 971), allowing shareholders holding, say, 3 percent of the shares to submit one name to run in opposition to the board-nominated candidates. At JPMorgan, 3 percent would be roughly $6 billion worth of stock.

But the Business Roundtable sued the Securities and Exchange Committee for its rulemaking on the grounds that companies would be forced to spend too much money opposing “frivolous” candidates who don’t really care about the best interests of the company, even if they were nominated by someone who happened to have $6 billion invested in it. The court bought that argument, and the rule was tossed out.

Shareholders are thus left with no recourse but to make protest votes against incumbents in whom they do not have faith. At JPMorgan, the CtW Investment Group contested the re-election of Ellen Futter, who serves on JPMorgan’s risk committee when she is not occupied by her day job as head of the American Museum of Natural History. Despite receiving $245,000 from JPMorgan for her part-time committee work, CtW Investment contends that Futter failed to diligently oversee risk, including the firm’s self-described “egregious” $6 billion risk-management fiasco known as the London Whale episode.

Beyond any considerations over protecting her $245,000 in income, Futter may be conflicted in that JPMorgan contributes generously to her museum. The company has given $3 million, Jamie Dimon and wife Judith have contributed thousands of dollars and, just to put a cherry on top, Dimon’s foundation has donated additional thousands.

Now, House committee in search of conflicts, just how tough do you think Ellen Futter is going to be on Jamie Dimon?Leadership on the House financial services committee may wish to intimidate firms that provide advice to shareholder advisory firms. But the committee should really focus on the real conflicts in corporate oversight that are hidden in plain sight.

Public Citizen believes shareholders should be able to exercise true ownership rights, such as over corporate political spending, whether a mega-bank would be worth more divided into separate firms, or whether management feels free to violate the law understanding penalties will ultimately be borne by shareholders as a cost of business. Cleaning out the conflicts of interest will be necessary before such ownership rights can be exercised fairly.

Bartlett Naylor is the financial policy reform advocate for Public Citizen’s Congress Watch division. Taylor Lincoln is Research Director for Public Citizen’s Congress Watch division.

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