In the first quarter of 2012, JPMorgan Chase lost over $5 BILLION because of the hedging strategy used to “reduce” the risk of their portfolio. This situation caused different reactions, both economic and social. There were also different questions about who had the fault of what happened. In this topic, we can find clearly a division of interests between stockholders and managers. Therefore, in this paper I will do a review of what they want and why, according this real situation.
Firstly, I don’t believe CEO should shoulder the whole blame. But they have a percentage of it. A CEO is the highest-ranking corporate officer (executive) or administrator in charge of total management of an organization. An individual appointed as a CEO of a corporation, company, organization, or agency typically reports to the board of directors. In a few words, they are in charge of the performance of the company, in this case, JPMorgan Chase. It is fair to think they are responsible for those results (a loss of $5 billion dollars), because they are who take decisions, apply it, and control it. But, in my opinion, management work is not easy. Economy is not an exact science. Results can vary. And in our case, results were negative. Its job is basically to manage the organization, but they don’t have any power about organization. They just work for a salary, compensations, bonuses, etc. So they will try company earn more money in somehow.
However, shareholders, the other part, are the owners of the organization. If company goes badly, they will lose their money. But managers, who don’t lose anything, have only options to earn more money with good and reasonable decisions and actions. Therefore, shareholders will try to keep their money safe. They are not in favor to risky decisions that can be dangerous for the wealth of the company. Here is the main difference, a manager could risk the money of the company in order to try to get more, while shareholders won’t do that, at least it is a secure option. One point is very important in this relation between both objectives. That point is the goal of managers. The primary financial goal of management is shareholder wealth maximization. So they have a duty with shareholders.
In our case, “the London Whale” was founded on the lower level on the hierarchy. He worked for a manager who worked for the CIO who worked for the CFO who worked for the CEO. Therefore, the responsibility goes at this order. The first responsible is his manager, then his boss, who worked for the CIO, and like this successively. I don’t understand how a person, at that level of hierarchy, could do what he did. There are a lot people who are responsible for that situation. In mi opinion, there wasn’t a good control about certain actions because of the size of the chain of command. And important decisions can’t be taken by personal which is located on that level of hierarchy.
When the situation is not good, there are always people who decide to leave. This is the case of the Chief Investment Officer Ina Drew (her unit had a $2 billion trading loss). She received $14 million in compensation for 2011, including $7.1 million in restricted stock, a $4.7 million cash bonus and $750,000 salary. As she did, there were managers who earned great amounts of money for theirs jobs as managers. However, after the big loss ($5 billion), Chief Executive Officer Jamie Dimon decided to impose a strategy of clawing back in order to recuperate money for shareholders’ interests. His actions weren’t unethical, in my opinion, they were correct. He was trying to punish bad actions and the bad performance done by managers. Dimon was looking for the executives responsible for the $2 billion loss. In fact, he had support by a great part of shareholders (91.5%) to his executive-compensation plan. Personally, I think Dimon was a perfect example of a good manager who looks for the maximization of wealth for the company directly and for shareholders indirectly. He imposed a plan to punish bad decisions, but to reward productive decisions and actions also.
However, there is something which doesn’t work for me. For example, with the Drew’s case, Dimon wanted to take back her earnings before she left and before the big loss. In my opinion, this company and all of companies shouldn’t take back bonuses previously granted to executives. They can’t take back any award, which was given by them at a healthy economic moment, when situation turns around. They rewarded managers for its work at that time, so managers cannot pay for something that is happening now with money they earned before the problem. A possible solution could be to have more control about managers, and more communication between owners and managers. Thus, bonuses would be more controlled at each moment, for example, at the end of each economic period. Sometimes bonuses are bigger that they should be, and that shows a lack of consideration to the future. We can’t spend all the money now; we have to think that situation could be change at any time, so we should be ready. This solution is not just for shareholders; it is for both. Because, if the company goes badly, shareholders will lose money and managers will lose jobs and reputation as managers.
In resume, the key to success in a company is a good relationship between stakeholders. A good communication and a good control about performance, it should be enough to get ahead. Managers must know perfectly its main goal and work with honesty. With these ideas, problems will be few.