May 21, 2013

The Battle Over JPMorgan’s CEO/Chair Split Proposal: The Gloves Are Off!

Today is the vote for what looks to be the most contentious battle of the proxy season – at least if the metric is ink spilt – here is the timeline of events as far as I can glean from media reports:

1. Co-shareholder proponents – AFSCME, New York Comptroller and Connecticut’s Retirement Plans successfully include a shareholder proposal seeking a split of the CEO and Chair positions in JPMorgan’s proxy statement. The company opposes the proposal.

2. Broadridge provides early voting results to both company representatives (and presumably their agents) as well as the co-proponents, who had paid Broadridge to distribute materials as part of an exempt solicitation.

3. Last week, there is a leak to NY Times’ DealBook about the level of early voting results. See my blog below on that.

4. Then, SIFMA calls Broadridge to complain about the co-proponents obtaining early voting results. Since SIFMA’s members are comprised of Broadridge’s brokerage clients, it acquiesces due to the contractual obligations that Broadridge has with its broker clients – as noted in this DealBook article. [Why was an association for brokers weighing in on an issue that seemingly is most relevant to investors and public operating companies? Perhaps because JPMorgan’s head of regulatory policy was SIFMA’s chief until earlier this year, as highlighted in this American Banker article.]

5. Shareholders go bananas about this change in Broadridge policy, including CII sending a letter to the SEC asking for the agency to intervene, as noted in this DealBook article.

6. Over the weekend, JPMorgan relents and allows early voting tallies to continue after a series of calls with the NY Attorney General, as noted in this DealBook article.

Here are long-time inspector Carl Hagberg’s thoughts on the facts as he knows them:

There is fresh news here about Broadridge giving information to folks who had paid them to send materials out on a closely contested matter which apparently was the case here – and which, arguably, might give them “standing” to receive such updates.

The most important thing to note regarding this ruckus is that such updates are mostly meaningless, given the fact the the deciding votes are not usually cast until the evening before the meeting – and sometimes the morning of – which is likely the situation at JPMorgan. In other words, knowing this information typically doesn’t allow anyone to predict what the final outcomes will be – because of the high percentage of “last minute votes” that are being cast by activist investors these days. At many meetings I’ve inspected, large shareholders will change their positions just before the polls officially close. And in really closely contested elections they may show up and cast their votes then and there – after hearing directly from the management at the meeting.

Also, knowing the results a few days or weeks early doesn’t necessarily indicate what might be the best thing to do about them from a tactical perspective – but that is another matter altogether. At best, all one can expect to learn from any sneak previews is if the voting is following previous trends on similar or identical matters.

Here is my own take based on the facts as I know them:

Unfortunately, the conduct of annual meetings is not subject to much scrutiny other than proxy disclosures. The regulatory framework is sort of a Bermuda triangle between state law, exchange listing standards and SEC rules. As I have said for a while, as the outcomes of annual meetings continue to grow into “real” events, this is going to be a huge problem. Think hanging chads and much litigation.

I had no idea that Broadridge’s practice was to share early voting results with proponents if they conducted a solicitation through Broadridge – although that certainly seems the fair thing to do. I don’t have Carl’s extensive experience with meetings, but I do think that having knowledge of early voting results can be beneficial in a contested situation. Regardless, the uproar over this situation points a spotlight on the need for the SEC’s proxy plumbing project to get back on track.

There are several other debates related to this vote, including whether it matters whether the positions are split or not. Here’s a Columbia Law School blog that illustrates the difference between a lead director and a non-executive board chair…

Leaks of JPMorgan’s Early Voting: Confidentiality Concerns

“Ah, you’re crazy.”
“Am I? Or am I so sane that you just blew your mind?!”
“It’s impossible!”
“Is it? Or is it so possible that your head is spinning like a top?!”
“It can’t be.”
“Can it? Or is your entire world just crashing down all around you?”
“Alright, that’s enough.”
– Jerry & Kramer in “The Stall” episode

That Seinfeld dialogue pretty much sums up my reaction to reading in the middle of last week about how JPMorgan’s voting on its controversial CEO/Chair split proposal was faring – even though the voting was supposed to be confidential ahead of today’s annual meeting. It’s a first for me to read about early returns in the paper.

A leak leads to several concerns. One is whether leaks other than to reporters are happening? The traditional insider trading stuff. Another concern is whether a leak might impact whether other shareholders bother to vote – or how they vote. Of course, this cuts both ways – investors irked about this development might choose to vote against a company who has leaked results. Although Carl Hagberg might be right that knowledge of early voting results may not be useful in all cases – I certainly don’t think that means that leaks are not problematic. They could move the market. What if this was a proxy contest for which early results were leaked?

A European Proxy Advisor’s Views on Voting Leaks

Here’s an excerpt from a blog detailing Manifest’s concerns with the voting tally leak:

With Dimon threatening to walk away if shareholders support the splitting of roles, thereby requiring him to relinquish the chair, the question is now material to the immediate valuation of the company. Investors generally don’t like uncertainty, and with commentators talking about the potential for a 10% drop in share price if the vote wins, access to information about how the vote might turn out is valuable.

Let’s be clear about one thing: although investors around the world may already have instructed how they wish to vote, they have not voted yet. The vote does not commence until shareholders at the meeting are invited to vote on the resolution in Tampa next week. Nor is Broadridge, from which the data has come, actually the entity tasked with formally tallying the votes at the meeting (don’t forget, they only have the information in the first place because of the regulation-supported monopoly the enjoy). That makes counting votes already submitted akin to counting the chickens before the eggs have hatched. Yet we are told that so far, the proposal to split the roles has 40% support, and that means “inside JPMorgan they believe they’re going to win this vote” (

Investors, especially those outside the US, will be shocked to see that their private voting instructions may be used to try to influence other shareholders in their decisions on the same issue (in the same vein, investors should also be equally concerned that some proxy advisors are urging shareholders to support the split – it’s none of our business as analysts!).

Clearly, it’s in the board’s interest and it’s their prerogative to discourage shareholders from supporting the proposal. But to take advantage of their access to early voting intentions as a part of their strategy is, at best, very bad sportsmanship, at worst potentially manipulative – not least when the issue at hand is potentially immediately material. This is especially true because access to the pre-meeting voting data is unavailable to all but the issuer – giving them a distinct information advantage (“Shareholders Denied Access to JPMorgan Vote Results“).

To European investors, this is nothing new – shareholder voting is a private matter between them and the company. However, the other side of the pond, things have never been as clear cut, and this week’s move by the US financial services trade lobby SIFMA to prevent leakage of sensitive voting data by Broadridge is an important development in the US recognizing the sanctity – and market value – of shareholder voting information. With the furor over Bloomberg accessing confidential user data, the breakdown of the LIBOR and oil price setting mechanisms, potential irregularities in transition management (to name but a few hot issues) the financial services industry also seems to be at last waking up to the importance of integrity in all aspects of investment operations.

There’s a reason why France has election laws that prohibit public opinion poll data being published in the final few days before an election. That’s because the chief architect of the Constitution of the Fifth Republic, Charles de Gaulle (not known for shunning powerful executive positions himself, don’t forget), recognized that the influence of the press and speculation about potential voting results can skew general opinion and the vote.

In the high stakes poker hand currently on the JPMorgan AGM table, the absence of a similar rule this time could prove significant in enabling Dimon to continue in both his current roles. Apart from the sheer quantity of votes cast against Bond, the other notable fact was the complete silence around the progress of the vote and its likely outcome which showed that we should not worry that confidential voting prevents the effective exercise of shareholder choice.

The JPMorgan/Dimon vote is a watershed in more ways than one. Let’s not miss this opportunity to ensure we have a proxy plumbing system which is fit for 21st century shareholder democracy.

– Broc Romanek