J.P. Morgan’s doubtful Dimon defense by Eleanor Bloxham @FortuneMagazine May 16, 2013, 5:34 PM EST E-mail Tweet Facebook Google Plus Linkedin Share icons FORTUNE — Sometimes it’s just better to not hit the send button. We’ve all done it, of course, and regretted it. J.P. Morgan presiding director Lee Raymond and governance committee chair William Weldon should have paused on Friday before sending a letter to shareholders defending Jamie Dimon’s dual role as CEO and chairman of the bank and the board’s actions. The missive not only missed its mark, it also unwittingly advanced the opposite of what they were hoping to defend. Clearly, there’s some external momentum for a makeover at the once-fabled bank, even if the board is still fighting change. Dimon, according to some reports, has grown petulant, saying he may resign if he doesn’t get to keep his position as chair. No doubt, the board is nervous, because if they ever had a succession plan, it’s currently in shambles as Dimon continues to shuffle the executive chairs on deck. Of course, someone would take the job if Dimon took his marbles and went home. And if that someone were to break up the bank, J.P. Morgan’s JPM public relations woes might come to an end. But what are the chances? Risky business, inadequate oversight It certainly took time to rouse Raymond and Weldon to action after the board issued an inadequate report on the London Whale trading fiasco last year. Strike one for the J.P. Morgan board for its languorous ways. It’s precisely that sense of lethargy that allowed the Whale fiasco to spiral out of control in the first place. MORE: A hole in JPMorgan’s Dimon defense According to a report issued by Senator Carl Levin, the London Whale trading losses were mounting in late January 2012 and throughout the first quarter of that year. In January, Dimon loosened the bank-wide risk limit. That same month, with Dimon’s knowledge, the bank changed the way it measured risk, reducing its reported risk by half. Around that same time, Dimon ordered the bank to stop sending investment office profit and loss data to the Office of the Comptroller of the Currency. In advance of the quarterly call where Dimon told analysts it was “a complete tempest in a teapot,” the press reported that the Whale trades were moving financial markets, and Dimon held daily internal conference calls on the losses that crossed $1 billion. Dimon “omitted mention of a number of key facts” of which he was aware, the Levin report states. Dimon at the time knew the Whale trades were no longer a hedge, the report says. So where was the board? Raymond and Weldon say, “There was no reason for the [board’s] Risk Policy Committee to have anticipated the far riskier strategy undertaken by CIO [chief investment office] during the first quarter of 2012 … [and the change in risk profile was] not brought to the attention of the Risk Policy Committee.” What kind of a board allows a CEO to change reported measures and risk limits with no heads-up? The board letter does not even attempt to discuss the disclosure concerns. Raymond and Weldon hoped their letter to shareholders would prove that the board is composed of upstanding businesspeople doing all they can for J.P. Morgan and its shareholders. But that’s sort of beside the point. Of course, they try. But does the board have the very best people, and do they have the right board structure? The letter doesn’t even try to defend or explain the Office of the Comptroller of the Currency’s low rating of J.P. Morgan’s board and management. Nor does it describe how J.P. Morgan’s board has acted to protect customers who nearly lost their homes due to paperwork errors. These would be important matters to discuss in light of the lawsuit recently filed by the California attorney general over alleged unlawful debt collection; it’s just the latest suit alleging that the bank deliberately disregarded its customers. Maybe the job is just too big for J.P. Morgan’s current audit and risk committee members. Maybe they can’t find the management team to fix the bank’s continuing and seemingly systemic operational and compliance exposures. But, clearly, more is required when you sit on a megabank board like this — and failing to address these fundamentals in their letter leaves one wondering what the board thinks is really important. The chinks in the CEO-chair defense In defending Dimon’s role as chair, Raymond and Weldon’s letter refers to a recent New York Times op-ed entitled “The Jamie Dimon Witch Hunt” by Yale professor Jeff Sonnenfeld. The op-ed defends the combined CEO-chair roles at the bank and more generally the concept of the CEO holding the chair position. Sonnenfeld and I don’t agree on this issue and, in fact, he explained my position well when he was quoted in the May 20 issue of Fortune saying, “CEOs are managing boards by giving [board members] a data dump overload.” Sonnefeld’s open indictment of CEOs who are “managing boards” contradicts the logic of a combined CEO and chair. It also demonstrates why it is imperative for companies to have an independent chair to lead a company’s board, oversee information flow, and make it clear who serves whom. MORE: IRS scandal may unleash a flood of conservative donors Raymond and Weldon’s letter refers to a paper Sonnenfeld cites in his Times op-ed. The directors say, “Recent research by Professors Matthew Samadeni [sic] and Ryan Krause of the University of Indiana found that the performance of financially successful firms was actually hurt when they separated the Chairman and CEO roles.” But the significant findings on separation in that paper relate to just 29 cases (out of a total of 309 cases examined) in which CEOs lost their chair positions around a decade ago, from 2003 to 2005. Krause, who just earned his Ph.D. from Indiana University, told me that the results “merit further investigation, [and] it’s not settled analysis.” He drew his data from the very first cases of CEO-chair separations after the advent of Sarbanes-Oxley. The results could very well be quite different in the present day, he says. The measure of corporate performance that the academic paper refers to isn’t net income or any other of a myriad of standard measures of financial success. Instead, the study looks at shareholder sentiment measured by stock price and dividend returns. On top of that, the study compared shareholder returns the calendar year that a CEO-chair split occurred to the returns in the following calendar year, no matter when during a year the leadership split took place. Using a broad sample, no matter what happens with the chair spot, any company that has a rising (or declining) shareholder return one calendar year will likely experience the opposite the next calendar year. (It’s called reversion to the mean, Krause says.) In the 29 cases dating from 2003 to 2005, the paper observes that those effects are just amplified. One other interesting finding from a broader sample: The study shows that a CEO’s departure has no effect on shareholder returns. Perhaps the J.P. Morgan board should focus on this finding when it determines the bank’s next steps. But the letter leaves you wondering if Raymond and Weldon actually read the paper they cited. Where is their healthy skepticism, a prerequisite for all good boards? Krause has done additional research on the chair position for his dissertation, and he believes separate chairs “allow [the board] the ability to be flexible in oversight.” That’s very important, as a matter of governance. MORE: Can you negotiate higher starting pay at a new job? The issue of who should be chair at J.P. Morgan isn’t just about Jamie Dimon, J.P. Morgan, or the banking industry. The issue is important for all boards. CEOs are hired guns. The board hires the CEO, and the board fires the CEO. The chief executive officer should not run the board. Richard Chambers, president and CEO of the Institute of Internal Auditors, puts it this way, “You would never have the CFO head the board’s audit committee. It’d be illegal.” The J.P. Morgan shareholder meeting is May 21. And the court cases against the company are still winding their way through the system. Clearly, Raymond and Weldon’s letter will not be the last word. Eleanor Bloxham is CEO of The Value Alliance and Corporate Governance Alliance ( http://thevaluealliance.com ), a board advisory firm.