ClW Investment Group

April 1,2011 David C. Novak Chairman of the Corporate Governance and Nominating Committee JPMorgan Chase Board of Directors Office of the Secretary 270 Park Avenue New York, New York 10017 Dear Mr. Novak, We welcome the outreach from Mr. Anthony Horan, JPMorgan Chase's Corporate Secretary, in response to our March 18 letter, in which we outlined serious concern regarding the authority, expertise and independence of the board's Risk Policy Committee. Mr. Horan has arranged a discussion for April 7 between the CtW Investment Group and certain members of JPMorgan management. We look forward to that discussion, but feel compelled to reiterate the importance of having independent directors participate in that dialogue. The active involvement of the independent directors in shareholder engagement is both a matter of good governance, and vital to addressing our central concerns regarding director independence and competence. It is our hope that a productive conversation with the independent directors can address investor concerns over the composition and mandate of the Risk Policy Committee. However, absent a compelling response to our concerns, we intend to urge JPMorgan shareholders to vote against the re-election of Ellen Futter on the grounds that she is a poor fit to serve on the Risk Policy Committee. Her continuing service, we believe, exemplifies the board's failure to address seriously its risk governance in the wake of the financial crisis. Futter, like her other two committee colleagues, brings little in the way of banking or financial regulation or risk experience; but in addition, her track record as a public director raises concerns and her directorship at JPMorgan harbors potentially serious conflicts of interest, as outlined in more detail below. We intend to begin conununicating these concerns to other shareholders shortly; however, as a first step, we welcome a discussion with you and the other independent directors regarding Futter's renomination to the board and the structure of the Risk Policy Committee. The CtW Investment Group works with pension funds sponsored by unions affiliated with Change to Win, a coalition of unions representing more than five million members. These funds, are substantial long-term JPMorgan shareholders. The Importance of Risk Governance Our concern lies with board-level risk governance - the setting of the risk appetite, and the establishment of clear lines of accounting and reporting lines that begin and end with the board - not with the risk management practices of individual business lines. We do not look to interfere with or micro-manage JPMorgan's internal risk management processes, and in fact, feel it would be improper for shareholders to do so. We simply seek to ensure that the board is adhering to industry best practices regarding the board's




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ultimate responsibility in the risk management process and that credible directors of the highest quality oversee those practices on the behalf of shareholders. The financial crisis itself, along with the ensuing regulatory reform efforts on bankers' pay, leverage, and banking activities, has made clear that the propensity for excessive risk taking by executives, managers and traders is a central, if not the primary, corporate governance problem to which banks are exposed. It follows, then, that board-level risk oversight must be carried out with the highest level of diligence, expertise and independence. The incorporation of risk into setting executive compensation is a start, but it does not relieve the board of its responsibilities to substantively, intelligently and objectively engage with the company's risk profile directly. Acknowledging this, many of lPMorgan's domestic and international peers have taken concrete steps over the last few years to recruit directors with expertise in financial risk and to bolster the mandate and resources of those directors. Unfortunately, based on the available disclosures, lPMorgan's board significantly trails its peers in these efforts, having taken very few visible steps to enhance its oversight of risk or recruit new director talent since the financial crisis. Present Practices Falling Short; Futter a Major Concern We are deeply concerned that the current three-person Risk Policy Committee, without a single expert in banking or financial regulation, is simply not up to the task of overseeing risk management at one of the world's largest and most complex financial institutions. As we noted in our prior letter, there are also significant shortcomings in the authority, responsibilities and resources of the committee as defined in the Committee mandate. Outlining a robust charter not only communicates with stakeholders, it is an important didactic exercise, providing the opportunity to clarify, assert and enforce the board's role in risk governance - an area that often meets with management push back. In fact, the consulting company Deloitte recently recommended to its banking clients that emulating the detail of board audit committees is a good starting point' . As we outlined in our March 18 letter, we therefore recommend that the board amend the Committee's charter to explicitly provide that the Committee: • • review, for full board approval, the risk appetite statement of the corporation on an annual basis; possess the authority to retain outside experts to assist in exercising independent and objective oversight of the organization's risk profile, risk appetite, and associated practices; maintain procedures for approving transactions that exceed certain risk tolerances and delegated authority; have open access to management and specified reporting lines to the Chief Risk Officer (CRO) and the Operating Committee, the management level committee; and

• •

I Getting Bank Governance Right: The bank board member's guide to risk management oversight, Deloitte Center for Banking Solutions available at ...!ZA_ fsi_ BS_ GettingBankGovemanceRight_160810.pdf

retain the right to commission specific reports from management on any riskrelated issue it deems relevant to fulfill its mandate.

Our gravest concern, however, is with the committee's current composition. Between them, the committee members - David Cote, CEO of Honeywell International Inc., James Crown, president of Henry Crown & Co, a privately owned investment company founded by the Crown family, and Ellen Futter, president of the American Museum of Natural History since 1993 - appear to lack relevant backgrounds in either banking or financial regulation. As such, it is unclear to shareholders how these individuals are able to perform an informed evaluation of management and the recommendations they put forward regarding risk, including, if necessary, challenging management's assumptions. Messrs. Cote and Crown, at best, appear to be of limited utility in fulfilling the Committee's critical mandate; Ms. Futter's membership, on the other hand, is alarming given that her tenures at Bristol-Myers Squibb and AIG coincided with significant governance and risk-management failures. Ms. Futter served on Bristol-Myers' audit committee from 1993 until 2002. The following March, the company disclosed it had inflated revenue through "channel stuffing" by nearly $2.5 billion. The scandal ultimately led to a fine of $3 00 million and corporate reforms to avoid criminal prosecution. Futter resigned from the board in 2006. At AIG, and perhaps even more troubling, Ms. Futter holds the unenviable claim of being the second-longest tenured independent director at the time of the insurer's collapse in mid-2008 and for having been a member of the Finance Committee (responsible for overseeing financial affairs and investment activities) from 2003 to 2005, a period that coincided with the dramatic expansion of credit protection offerings. Before the crash, AIG was embroiled in an accounting scandal, which also took place during Ms. Futter's tenure, that ultimately involved a reduction in the insurer's book value by $2.7 billion and payments totaling of $1.64 billion to state and federal regulators to settle allegations that it misled investors. More red flags are raised by Ms. Futter's role on JPMorgan's board by the large corporate contributions the bank makes each year to the American Museum of Natural History, Ms. Futter's primary place of employment for nearly two decades. According to the museum's annual reports, JPMorgan gave $1.5 million in 2008 for a special exhibit and is regularly a top corporate contributor. In fact, going back through the museum's records, it is quite remarkable to see the notable contributions made by other companies at which Futter has served as a director, an issue that was highlighted as far back as 2003 by the Wall Street Journa12. There is No Time/or Complacency

JP Morgan navigated the financial crisis far better than many of its peers. Nonetheless, the board cannot afford to lull itself into a false understanding of its own capacities for

"Giving at the Office on Corporate Boards," by David Bank and Joann Lublin, Wall Street Journal, June 20,2003.

overseeing the bank's risks going forward. Not only are those risks likely to be more technically complex - and thus demanding of the committee's time and understandingthey will continue to raise thorny issues from a corporate governance perspective that require skilled, independent directors, per below: • As a result of the acquisitions of Bear Stearns, Washington Mutual and various commodities operations from RBS Sempra Commodities, lPMorgan is now larger, more geographically diverse, and additionally complex than it was before the crisis. Total assets are up 77% from 2005 to $2.1 trillion, while acquisitions and internal growth have propelled lPMorgan into a major player across all major investment banking categories. Even if the Risk Policy Committee had been able to maintain effective oversight of yesterday's lPMorgan, it does not automatically follow that the same three-person committee is capable of overseeing the dramatically larger, post-crisis bank. We also fail to see how the committee can credibly keep tabs on the exposures and risks in the company's vast derivative portfolio, which accounts for 34% of all derivative activity in the US, or $78 trillion in notional value as of the end of fiscal 2010. We note that Warren Buffet is among the commentators who have expressed concern over the systemic risk implications of such a huge derivative book.3 Second, the regulatory response to the crisis has multiplied, not simplified or reduced the risk and reward opportunities the board must oversee and ultimately resolve in the best interests of shareholders (which do not always coincide with the best interest of managers). The uneven pace of global financial reform creates new opportunities for regulatory arbitrage that may be attractive to executives to exploit, but not necessarily in the best long-term interests of shareholders. In a similar vein, it is troubling to see banking executives take the lead in efforts to stem the regulatory response to the financial crisis, which given the drawn out implementation of the Dodd-Frank Act, remains under intense pressure from industry lobbyists; unless independent directors show strong leadership, board efforts to safeguard shareholders against excessive risk may be undermined by a regulatory landscape that still enables such practices. This is especially problematic given that the moral hazard of too big to fail is likely a permanent fixture of the political landscape, even if executives cry otherwise. Lastly, given the popular narratives that have emerged around lPMorgan's handling of the crisis, it is sobering to remember that lPMorgan shareholders suffered through more than $56 billion in bad loan charge-offs in recent years

In his testimony before the Financial Crisis Inquiry Commission, Buffet raised the specter of JPMorgan's derivative book, expressing concern for what "discontinuities" - such as a major terrorist attack - could have on the assumptions that help reduce gross credit exposures in the trillions to a total credit exposure of $345 billion, or 265% of risk-based capital (according to the Comptroller of the Currency's most recent quarterly report on bank trading and derivatives activities). "1 think it is virtually unmanageable," Buffet said.

and would have likely faced far greater losses without the unprecedented interventions by governments and central banks to prop up the financial markets. At present the loan loss reserves stands at $32 billion, and investors are still waiting to see how much the robo-signing debacle will cost, along with any resolution to the private-label put-back issue.

It is Incumbent on the Board to Address Its Risk Governance Before the Next Crisis Hits
Shareholders entrust to members of the Risk Policy Committee one of the most important and toughest challenges in corporate governance today. It is encouraging that JP Morgan weathered the financial crisis of2008 relatively better than its peers. JP Morgan's peers in the financial sector that have already taken steps to address risk governance concerns largely did so in reaction to that crisis and the resulting impact on their companies. Having been witness to those lessons, it is incumbent on the board of JP Morgan to take action before the next crisis hits. As directors of one the world's most complex, multi-service financial institutions, JP Morgan's board must take decisive action to shore up deficient risk governance practices and adopt industry best practices. It is even more critical that the board ensure that its Risk Policy Committee is comprised of directors with the necessary experience and expertise to fulfill the Committee's mandate. Unfortunately, we believe the current committee lacks the authority, expertise and independence necessary to perform this role effectively. Absent a compelling response to the concerns raised here and in our March 18 letter, we intend to urge JP Morgan shareholders to vote against the re-election of Ms. Futter and to join our call for overhauling the Risk Policy Committee's charter. We intend to raise these issues with institutional investors assembled in Washington, DC for the Spring Meeting of the Council of institutional Investors on Apri13-5. We also look forward to continuing the discussion of these matters on April 7. Sincerely

William Patterson Executive Director cc: Crandall C. Bowles, Stephen B. Burke, David M. Cote, James S. Crown, Ellen V. Futter, Jamie Dimon, William H. Gray, III, Laban P. Jackson, Jr., Lee R. Raymond and William C. Weldon

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