Felix Salmon

Jamie Dimon needs a boss

Felix Salmon
May 17, 2013 17:07 UTC

Jamie Dimon is wagging his finger from newstands across America this week, above the kind of headline his PR team can only dream of: “DIMON IS FOREVER: Why Jamie Dimon is Wall Street’s Indispensable Man”.

The story itself, by Nick Summers and Max Abelson, consists mainly of rich corporate insider types talking about how wonderful Jamie Dimon is, and how ridiculous it is that anybody might consider stripping him of the chairmanship of JP Morgan. Here’s a doozy:

Admiring rivals have been known to call Dimon “the sun god.” That cosmic aura has real use, says Kathryn Wylde, who served on the Federal Reserve Bank of New York’s board with Dimon until his term ended last year. “There’s no doubt that it helped the bank, because so much of that business is built on confidence.” The intrusion of shareholders, in the form of a vote on Dimon’s dual roles, she adds, is “indefensible if the company is performing well.”

Wylde is one of those great-and-good people who turn up on boards all over the place: not only the New York Fed, but also everything from the NYC Economic Development Corporation and the Manhattan Institute to the Lutheran Medical Center and the US Trust Advisory Committee. Her day job is serving as the president and CEO of the Partnership for New York City, a partnership made up exclusively of large companies and the rich people who lead them. JPMorgan is unshockingly among them. Her view of the role of shareholders in corporate governance is fascinating: it’s “indefensible” for them to care about such things so long as they’re getting paid.

But clearly shareholders do care about governance: both Institutional Investors Services and Glass Lewis, advisory firms paid to work out what is in the best interests of shareholders, have come to the entirely reasonable conclusion that Jamie Dimon should not keep his job as chairman of the board.

The battle line between princpals and agents has never been more clearly delineated than it is here. The shareholders of JP Morgan — the owners of the company — want a board which represents their interests, and which can control what the CEO does. The managers and captured professional board members, on the other hand — the CEO class — have rallied around Dimon in an impressive display of high-wattage solidarity. Bloomberg Businessweek quotes Bill Daley, John Mack, Jimmy Cayne, Phil Gramm, Dick Kovacevich, and “two dozen of Dimon’s peers and colleagues” in his defense; Andrew Ross Sorkin, for good measure, adds Barry Diller and Hank Paulson.

Will shareholders see this awesome display of PR firepower and decide that Jamie’s right, he should stay on as chairman after all? If they’re narrowly focused on the short-term future of the JP Morgan share price, then probably they will. After all, Dimon has petulantly threatened to quit if the motion goes through, which would be bad for the share price — and as all of these articles are at pains to point out, there’s not much evidence that splitting the chairman and CEO roles is likely to do any particular good for JP Morgan’s share price over the medium term. (It can help underperforming companies, but that effect disappears with respect to relatively strong ones.)

The cult of the CEO is still going strong: just look at the way Bloomberg has appointed the ex CEO of IBM to try to help the company recover from its recent data scandal. So maybe if you get enough CEOs supporting Dimon, their collective weight will help tip the balance. (Although it’s hard to believe that any shareholders particularly value the opinion of Jimmy Cayne on this issue.)

But the fact is that Dimon should not be chairman of JP Morgan, and shareholders can see exactly why just by looking right there at the cover of Bloomberg Businessweek. No one man should ever be indispensable, and it’s the job of the chairman to ensure that the company is in good solid health no matter what happens to the CEO.

A fuller, and quite wonderful, explanation has also been offered up by the Epicurean Dealmaker, who makes a few more salient points. He explains:

The entire point of separating the roles of Chairman of the Board and Chief Executive Officer is that they have different responsibilities and duties. They are different jobs. Now, perhaps at smaller companies with simple business models and uncomplicated objectives (grow revenues fast enough to meet payroll and pay the bank on time), there is no practical need to separate them. But the bigger a company gets—and I think we can all agree J.P. Morgan is about as big as a firm can get—the breadth and scope of duties each role properly possesses expands dramatically.

Even if Dimon is a great CEO, there’s really no evidence at all that he’s a great chairman, and JP Morgan’s shareholders have the right to install the best possible officeholder in each of those roles.

How do we know that Dimon is a bad chairman? Well, there’s the fact that there’s no good succession planning, for starters. And then there’s the board itself, which is basically a bunch of supine muppets, who do as they’re told rather than actually representing shareholders and holding the CEO to account.

Most intractably, there’s the question of shifting goalposts. As the Epicurean Dealmaker points out, Jamie Dimon is the very last person on the planet who should be in charge of judging whether Jamie Dimon is doing a good job as CEO. For instance: it’s impossible for a bank with $2.4 trillion in assets and 256,000 employees to stay out of regulatory trouble entirely. But how many fines is too many? As Businessweek points out, “the litigation section of the bank’s quarterly filings now runs to almost 9,000 words, or 18 single-spaced pages.” At what point does the litany of legal and ethical lapses become so long that the CEO has to take responsibility, and/or break up the company into small-enough-to-manage chunks? This is an important question, and Jamie Dimon cannot answer it. You need an independent board to do that — to set the goalposts — and JP Morgan’s board is not independent.

In theory, shareholders elect directors, who hire the CEO to run the company. In practice, the CEO picks the directors he wants, pays them a handsome stipend for doing nothing, and they in turn make no attempt to listen to what the company’s shareholders might desire. In fact, they’re quite offended when it’s suggested that they might want to do that at all.

The debate about this vote often seems as though it’s two groups of people talking at cross purposes to each other: the Dimon defenders are making it all about him personally, and what a good job he’s done running the company, while the good-governance types generally say nothing personally about Dimon at all, and instead insist that all they’re doing is standing on principle.

But in fact this is about Dimon personally: it’s about how much power one man can or should be allowed to have. Dimon has too much. It’s time to give him a boss.


I sold JPM in 2002 when I left at $56. It has been “dead money” since”
He should have been fired when he offered to sell Bank One for “Par”!
But Jim Crown interfered with that!!

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Are Cooper Union’s finances fixable?

Felix Salmon
May 11, 2013 21:21 UTC

James Stewart has an important column on Cooper Union today: if you read it carefully, it hints at how much further Cooper might yet fall from its founding mission of providing free education. Cooper’s trustees are press-shy these days, but Stewart snagged an on-the-record interview with one of the most important ones: John Michaelson, the chair of the investment committee.

Stewart chides Michaelson for his reliance on hedge funds, which have not served the Cooper endowment well. In the 2012 fiscal year, for instance, Cooper’s returns on its managed endowment were negative: they were down 5%, in a period where a standard mix of 60% stocks and 40% bonds would have returned a positive 8%. And with more than $100 million in hedge fund investments in 2008, Cooper was paying more than $2 million a year in hedge fund management fees alone, never mind performance fees. That’s the kind of money the college desperately needs for operational expenses.

Still, overall, Stewart is far too gentle on Michaelson, who was pictured grinning next to former president George Campbell in a highly-mendacious 2009 WSJ article extolling the performance of the Cooper endowment. Here’s how Stewart characterizes the endowment’s performance:

Compared with many universities, Cooper Union did a good job managing its endowment through the recent financial crisis. As recently as 2009, the school maintains, it ranked first among all American universities for endowment performance.

In reality, as Stewart never really explains, that “endowment performance” was entirely fictional — it was magicked out of thin air when Michaelson revalued the land under the Chrysler building upwards in order to mask a torrid performance from the rest of the endowment.

On top of that, Cooper levered up its endowment at exactly the wrong time, borrowing $34 million at an interest rate of 5.875% and investing it in the endowment, where it promptly evaporated during the financial crisis. Michaelson tries to explain this away by saying that the borrowed money was kept in cash, while it was the rest of the endowment which lost money. But if you look at the endowment that way, then, as Stewart points out, hedge funds accounted for more than 60% of the funds Michaelson was managing. That’s an insane ratio, especially given that Michaelson was quoted in the WSJ as being “especially critical” of the Yale Model of investing in illiquid alternative asset classes.

Stewart also goes easy on the trustees — Michaelson foremost among them — for making their single biggest mistake: borrowing $166 million to build the grandiose New Academic Building. “Hardly anyone disputes Cooper Union’s need for new engineering facilities,” he writes — and he’s hilariously, egregiously wrong about that. Virtually everyone outside the Board of Trustees disputed Cooper’s need for new engineering facilities — even a large chunk of the engineering faculty, which had the most to gain from the new building. The “need”, it’s now abundantly clear, was not a real need at all; instead, it was a device, an excuse to make the decision to construct the new building seem reasonable, even necessary.

Stewart essentially says that Cooper did need to build something new, it just didn’t need to build something quite as grand and expensive as it ended up with. But he’s deeply and importantly wrong about that. Here’s the thing about mortgages: they’re not just free money, they’re something you need to pay off, over time. And in order to do that, you need income. When Cooper Union’s trustees, including Michaelson, took out a $175 million 30-year fixed-rate mortgage at 5.875%, they knew exactly how much money Cooper would need to repay that mortgage every year.

And they had no idea where that money was going to come from.

This — much more than any endowment mismanagement — was the colossal, fatal error made by Cooper’s trustees. There are generally two ways of paying down a mortgage: either you go to work and earn money you then use to pay the mortgage, or else you rent out the building itself and use the income it generates to cover the mortgage payments. Neither route was available to Cooper: all of its income, and then some, was needed to run the school, which meant that there was nothing left over to pay the mortgage. And with the exception of a tiny coffee shop on the ground floor, Cooper isn’t renting out any of the new building.

At the end of Stewart’s piece, Michaelson makes a very important admission:

Mr. Michaelson conceded that the school could have continued to invade the endowment to cover deficits and would have survived until 2018, when the higher payments from the Chrysler lease kick in. “But what kind of school would you have had by then?”

The answer, of course, is a free one; if this really was an option, then the trustees owe the Cooper community a serious, detailed explanation of how and why they ended up making the decision to charge.

But the real answer is that while the higher payments from the Chrysler lease would be enough to cover the operating costs of a small, excellent college, they would not be enough to cover Cooper’s operating costs and the mortgage payments on the new building. Michaelson is making it sound, here, as though he decided to charge tuition for the sake of the school. In fact, he decided to charge tuition because that’s the only way that the school can pay off the monster loan he took out with no conception of how he could ever pay it off.

What’s Michaelson’s explanation of where he thought the money for the mortgage payments was going to come from? He doesn’t seem to have one, but the closest thing that Stewart finds is a deluded “if you build it, they will come” mindset:

Trustees told me that the college’s development consultants told them that a signature building with a marquee architect — in this case, Thom Mayne of Morphosis Architects — would attract a large donor eager to have his or her name on a trophy building.

But no such donor materialized, and experts I consulted said Cooper Union had it backward — the first step is to attract the donor, who then is involved in choosing the architect and designing the building. “I’ve never heard of a case where you build the building first and hope a donor comes along,” said Kenneth E. Redd, director of research and policy analysis for the National Association of College and University Business Officers.

Passing the buck like this to anonymous “development consultants” is just despicable. It was the board which borrowed $175 million without being able to pay it back, not the development consultants. And what’s more, it was the board which locked in a fixed 5.875% interest rate for the next 30 years, which isn’t the kind of thing you do if you’re basically just borrowing money on a short-term basis before a deep-pocketed donor comes along to pay off the mortgage in full.

And in any case, according to what we now know, once the building had been constructed and no beneficient billionaire had materialized to pay for it, Cooper was financially doomed: it had no ability to pay off the monster mortgage. If that was the case, then why on earth was Michaelson telling the WSJ — after the New Academic Building was finished — that Cooper’s financial condition was positively rosy?

All of this, however, is stuff we already knew, pretty much. The scariest part of Stewart’s article comes with another quote from Michaelson, where he grumbles about the fact that most of Cooper’s income comes from the Chrysler Building. (The land under the Chrysler Building was bequeathed to the college by Peter Cooper.)

Stewart quotes Michaelson as saying that having 84% of the endowment in a single asset “is against everything I stand for”. He then does a lot of back-of-the-envelope calculations designed to show that maybe Cooper should sell the land under the Chrysler Building, and intimates that the main reason Cooper hasn’t done so is the board’s “nostalgic attachment” to the asset.

On its face, this is completely crazy. The land under the Chrysler Building is worth substantially more to Cooper Union than it is to anybody else, because under a deal that Cooper Union struck with New York City, the college receives more than $18 million per year in something called payments in lieu of taxes, or PILOTs. That’s the amount of money that the building would normally generate in property-tax payments for the city; instead, those payments end up going straight to Cooper Union, and New York City gets no property tax revenues at all from the iconic skyscraper.

If Cooper sold the land under the Chrysler Building, all those property tax payments would revert to New York City, rather than the new owner, and a substantial revenue stream would be effectively destroyed, rather than sold. I don’t know what the net present value is of the Chrysler Building’s PILOTs, but it’s got to be somewhere in the region of half a billion dollars, if not more. It makes no sense whatsoever to give that up for nothing.

So why is Stewart taking this cockamamie talk seriously, and why is Michaelson talking with a straight face about selling the land under the Chrysler Building? The answer, I fear, is that Cooper Union, in deciding to charge tuition, has given New York City more than enough ammunition to tear up the deal whereby Cooper gets the Chrysler Building’s PILOTs.

Cooper Union says that the current occupation of the president’s office “has created a poisonous and dangerous atmosphere that can potentially destroy the school forever”. No one in the administration is going to come out and say explicitly what that means, so let me translate it into English for you: they’re saying that the more noise Cooper’s students make in protest at the tuition decision, the more likely it is that New York City is going to decide that it wants its property-tax revenues back, and that Cooper Union, without free tuition, is not a worthy enough cause to justify an effective $18 million per year public subsidy.

If Cooper loses its PILOT payments, then that really would be financially devastating for the college, and it would at that point be effectively forced to liquidate the Chrysler asset, whether it wanted to or not. It seems to me that Michaelson is using Stewart to help lay the groundwork for such an eventuality, and is trying to make the case that selling the Chrysler Building land is not such a dreadful thing to do after all.

I don’t buy it. But looking at what Michaelson says in Stewart’s piece, I can’t help but wonder whether maybe there is a solution here after all. The problem, remember, is that Cooper can’t sell the Chrysler Building land because if it were to do so, the new buyer wouldn’t receive those massive PILOT payments. But what if the purchaser of the land were another important civic institution? Could Cooper Union, working with the Bloomberg administration, work out a deal whereby the Chrysler Building land — with its PILOTs intact — could get sold to Trinity Church, or one of New York’s big non-profit hospitals, or even possibly the Bloomberg Foundation? New York has no shortage of massively-endowed foundations and non-profit organizations which have the wherewithal to buy such an asset; many of them might be interested in it.

It’s not clear why New York City would have any particular desire to go along with such a deal, unless they could by doing so claim to have managed to preserve Cooper Union as a tuition-free college embodying Peter Cooper’s founding principles. In other words, Cooper’s board of trustees would have to go back on their decision to start charging tuition. But the proceeds from selling the Chrysler Building land would be more than enough to pay off the mortgage on the New Academic Building; and at that point, the trustees would just have to work out how many students they could afford to teach on the income from the money left over. Cooper Union would continue to exist, it would continue to be free, and Mike Bloomberg would end up capping his tenure as mayor by saving a noble institution from the brink of disaster. I think Jamshed Bharucha should put in a call, even if he has to do so from his home phone.


Enlightening. Great and necessary clarification. To bad it’s needed. Thank you, thank you.

ML, CU A’76

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The IIF implodes

Felix Salmon
May 8, 2013 21:21 UTC

There’s a lot of money and power at the nexus of banking and policymaking, home of the infamous revolving door and the natural habitat of people like Mike Froman, America’s new trade representative, who has shuttled back and forth between government and Citigroup and who, behind the scenes, helped pick all of Barack Obama’s initial economic team. And wherever there’s money and power, you’re sure to find turmoil. If Promontory is the big winner these days, there’s also bound to be a big loser. Let me introduce you to the IIF.

The Institute for International Finance describes itself as being “the most influential global association of financial institutions” — where by “influential” it means that it aspires to have the ability to persuade policymakers what to do. For most of its existence it was run by Charles Dallara, a former Treasury official who spent two years at JP Morgan before becoming head of the IIF in 1993. He stayed in that job for 20 years; in 2011, the last year we have numbers for, he was paid $3,955,381 for his efforts. That’s 20% of the IIF’s total payroll; the other 104 employees, between them, took home a slightly more modest, but still impressive, average of $153,870 each.

Dallara was replaced by Tim Adams, another former Treasury official — but “replaced” is not really the right word. The IIF was Dallara, and without him, it seems, the IIF is nothing. For all that it has 105 employees and prides itself on having a truly global membership, Dallara turned the IIF into what Adams calls, in a Powerpoint presentation circulated to the entire staff, a “founder-led, personality-driven” enterprise. (The presentation, entitled “An Era of Rapid Change, Repositioning and Renewal”, is essentially Adams’s buzzword-laden manifesto for keeping the IIF relevant.) Dallara was a notoriously tyrannical micro-manager; the not-so-secret of career success at the IIF was always to do everything and anything Dallara wanted, and nothing else. When Dallara left, his yes-men — and the IIF’s top execs are overwhelmingly men — had no idea how to react, and the Institute inevitably collapsed into a viper-pit of political infighting.

Already, there have been two high-profile casualties: the IIF’s long-standing chief economist, Phil Suttle, has been fired, as has its PR chief, Gary Mead. (Unsurprisingly, the IIF didn’t manage to respond to my requests for comment.) More worryingly, Bank of America has resigned its membership, and there seem to be questions over whether other big US banks might follow suit, with at least one of them allegedly hundreds of thousands of dollars behind on its membership fees. That’s very bad news for the IIF, which is nothing if it’s not a shop where the world’s most important policymakers can rub shoulders with senior executives of the world’s biggest banks. The IIF’s membership changes over time, but at its core is always the select global group of systemically-important financial institutions. If it’s losing the likes of BofA, it’s losing its raison d’être.

In recent years, the IIF has also become something of a ham-handed lobbying shop, to the point at which a capital-markets-friendly outlet like Euromoney will happily and openly dismiss its claims as so much self-interested claptrap. The change dates back to the global financial crisis, which caused a massive rise in demands for global financial institutions to be regulated much more assiduously. The institutions fought back, through the IIF, with 161-page report detailing the gruesome economic consequences of doing so. A taster, to take you back to the summer of 2010:

IIF Deputy Managing Director and Chief Economist Philip Suttle, who is the lead author of the new report, said the impact is not the same in each part of the world, given differences in each banking system and in the roles banks play in the broader economy. The analysis suggests that for the Euro Area a weaker recovery with real GDP some 4.3% less than otherwise might be the case and with new job creation, therefore, being potentially some 4.6 million lower over the 2011-2015 period than otherwise might be the case. The respective projections for GDP and for employment on this basis for the United States would respectively be 2.6% and 4.6 million. For Japan the projected numbers on this same scenario would be 1.9% and around 0.5 million jobs to 2015.

Suttle, here, was essentially saying that if the Basel Committee and others actually did their jobs and regulated the banks to the point at which they were significantly less likely to blow up the global economy, then the cost of doing so would be trillions of dollars and millions of jobs. The banks don’t like to be reminded of this report, partly because it was based on ludicrous assumptions, and partly because the reforms ended up happening anyway, and as a result the banks now need to claim, at least in public, that they’re fully supportive of their wise regulators.

As a result, Suttle got thrown under the bus — although the report came from the institution as a whole, and had the sign-off of a very high-powered board, including Dallara. The problem is that the IIF is still trying to have it both ways. Even as it tries to butter up policymakers, especially in central banks, it continues to talk about the enormous cost of proposed policies. And if the press doesn’t take its pronouncements seriously, policymakers are even less impressed: within serious institutions like the New York Fed, for instance, the IIF has become little more than a punchline to an unfunny joke.

Charles Dallara might have been, as I described him last year, an “amiable buffoon” — but at least he was an amiable buffoon with access. Since his departure to a Swiss private-equity shop, the IIF has not only been leaderless and rudderless; it has also been completely out of the loop on key issues such as the treatment of deposits in Cyprus. In a world where the financial services lobby has never been more sophisticated, the IIF feels like an anachronism, and Adams’s attempts to reinvent it are doomed to fail. If he were starting up a new association that would be hard enough, but given the quantity of entrenched dysfunction at the IIF, turning it around to be, in his words, “faster, shorter, sharper, relevant” is simply not going to happen. Adams may or may not have a clear vision of where he wants to go — his presentation is pretty vague and fluffy — but even if he does know where he’s going, there’s really no way of getting there from here.

The IIF won’t be missed, at least by anybody who isn’t a banker with a fondness for rubber chicken. But its fate should be salutary for any institution with a powerful chief executive. If that chief departs without some very clear succession planning in place, it can be extremely difficult for the institution to survive.


I am a former employee of the IIF. I am shocked by how well you know the IIF inside out. Just a clarification on the average salary. Most employees at the IIF make a modest salary. The Directors all take in $300-700K in salary and bonus. Thats what skews the number. Check out guidestar.org.

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Why CEOs should be rewarded for stock buybacks

Felix Salmon
May 6, 2013 17:03 UTC

Scott Thurm and Serena Ng have an odd piece in today’s WSJ, complaining about executive pay being tied to per-share results rather than overall numbers. Their poster child is Safeway CEO Steven Burd, who has overseen a substantial increase in earnings per share even as sales and profits have gone nowhere, by spending $1.2 billion on stock buybacks.

The implication here is that public companies should be concentrating on growth, rather than on more financial metrics like earnings per share or return on equity. And I think that’s exactly wrong. Not all companies should be growing; some of them, in order to maximize their return on capital, should instead be shrinking. The world’s biggest banks are a good example: most of them are trying to shrink, because doing so will make them leaner, more efficient, and ultimately more valuable.

Stock buybacks aren’t always a good idea: companies do have a tendency to spend far too much money on them at exactly the wrong time, when the share price is high. (There are many examples, but one of the most tragic is probably the New York Times Company, which today is in desperate need of the $2.7 billion it spent on stock buybacks between 1998 and 2004, when the stock was much more expensive than it is now.)

On the other hand, stock buybacks are a very efficient way of returning money to shareholders: they’re basically a pick-your-own-dividend scheme. Many shareholders, especially individual shareholders in high tax brackets, dislike dividends, because they’re taxable income. But if a company takes the money it would otherwise spend on dividends, and spends it instead on buybacks, then shareholders have a choice: they can sell any proportion of their shares back to the company, in line with their liquidity needs, and if they sell nothing then the value of their shares goes up just because the total number of shares is going down. On top of that, companies don’t feel the same need to maintain a steady level of buybacks, in the way that they do feel the need to maintain a steady level of dividends.

If more public companies concentrated on earnings per share rather than overall earnings growth, that would probably be a good thing. Right now, it’s almost impossible to be a successful CEO of a public company whose industry or company is in long-term secular decline. And private-equity companies are well aware of that fact: they love to buy up such firms and extract vast amounts of money from them before they die. Rather than see the spoils of such tactics accrue mainly to the Mitt Romneys of this world, it would be great if the broad shareholding public could also participate in the efficient rotation of capital out of declining industries and into growing ones.

That’s the way the stock market is meant to work, after all: you invest in companies while they are growing, in the hope and expectation that you will be able to make money from their high future cashflows once they reach maturity. But in practice the stock market has great difficulty valuing companies which make large but falling profits, with the result that most of those profits ultimately end up going to private-equity types once the companies are acquired in a leveraged buy-out.

Safeway is faced with a choice right now: it can burn billions of dollars in what would probably be a fruitless attempt to compete with Walmart, or it can return those billions to shareholders, to be reinvested in more promising areas. Safeway’s CEO should choose between those options dispassionately, rather than simply assuming that more investment is always better — and his board should compensate him in such a way that he’s incentivized to make the best decision, rather than always going for growth.

Stock buybacks are an efficient way of returning money to shareholders of a shrinking company, and as such they’re an important part of the public-company CEO toolbox. I’m sure they can be abused at times to manipulate quarterly earnings. But they can also be a pretty efficient way of doing what the stock market is meant to do best: distributing capital to where it can be most effectively deployed. If Safeway has more capital than it can efficiently use, then it should return that capital to the market, where it can be recycled into more promising investments. And in principle it’s entirely reasonable to reward the CEO for doing just that.


Felix, test your take against David Stockman’s, who, after summarizing how Cisco and ExxonMobil have used stock buybacks to enrich senior management, writes:

“The truth of the matter is that the management and board of … most public companies, are addicted to share buybacks. Buy-backs are the giant prop which keeps share prices elevated, existing stock options in the money and the dilutive impact of new awards obfuscated. They are also the corporate laundry where Federal income taxes are rinsed out of top executive compensation through the magic of capital gains.”

David Stockman, “The Great Deformation,” p. 458.

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It’s time to air Cooper Union’s dirty laundry

Felix Salmon
Apr 24, 2013 19:44 UTC

If you want to really understand the importance of Cooper Union and its century-long tradition of free tuition, I can’t recommend Sangamithra Iyer’s excellent article in n+1 highly enough. And it contrasts greatly, of course, with the official statement from Cooper Union’s Board of Trustees, saying that the college is going to stop being free very soon: beginning, in fact with the students entering in September 2014. The statement is curiously upbeat, for a decision which essentially marks the death of Cooper Union as we know it. And it’s chock-full of the kind of doublespeak which is all too easily deciphered:

After eighteen months of intense analysis and vigorous debate about the future of Cooper Union, the time has come for us to set our institution on a path that will enable it to survive and thrive well into the future…

Under the new policy, The Cooper Union will continue to adhere to the vision of Peter Cooper, who founded the institution specifically to provide a quality education to those who might otherwise not be able to afford it…

Maintaining the highest standards of excellence means that we must constantly aim to improve through investment…

Although we appreciate that these decisions are difficult for everyone to accept, we look forward to working together with all of you to building a future that will ensure the preservation of Cooper Union as a great educational institution that remains true to Peter Cooper’s founding principles.

The fact is, as Iyer clearly lays out, that charging tuition runs in direct violation of Peter Cooper’s vision and his founding principles. Indeed, the original Cooper Union charter held the institution’s trustees personally responsible for any deficit, while ensuring that education was free to all enrolled students.

Over the past 40 years or so, however, Cooper Union has been living beyond its means, financing structural deficits by periodically selling off various bits of land that it owned inside and outside New York City. That’s clearly an unsustainable strategy, and it finally came to an end when Cooper Union sold off the last sellable plot it had — the old engineering building at 51 Astor Place, which is now becoming a big ugly office block. The proceeds from that sale failed to remotely cover the costs of building the fancy New Academic Building at 41 Cooper Square — a building which the NYT’s architecture critic, Nicolai Ourourssoff, declared upon its opening to be an icon of the “self-indulgent” “Age of Excess”.

But here’s the most astonishing thing, at least to me: no one seems to care how this happened, no one has been held responsible, no one has been blamed. The current trustees talk vaguely about how they “share your sense of the loss” of free tuition, but they don’t apologize for their decision, and not one of them, as far as I can tell, has resigned in protest or shame.

Make no mistake: Cooper Union suffered a massive failure of governorship, and its trustees have abandoned the principle which underpinned the entire institution. A trustee is someone who governs for the benefit of others — and Cooper Unions trustees have failed, spectacularly, in their first and highest role, which was to preserve Peter Cooper’s tuition-free institution.

And after failing so miserably at their own jobs, the trustees then had the nerve to announce, right in the middle of dropping their bombshell, that they expected the current students of Cooper Union to give more to the institution! Never mind that Cooper Union will never be the same again, and that the whole reason why it is so beloved has now been jettisoned. Start donating today, and maybe future students might be able to save a few hundred bucks on their future tuition bills. Or maybe the president will just get a raise to $1 million a year. Who knows: the trustees seem to be capable of anything.

There’s a lot of recrimination going around right now, and the entire Cooper Union community is in desperate need of some catharsis; the trustees, collectively, and over time, managed to break the very thing that they were entrusted to preserve. Cooper Union’s students, and alumni, and faculty, and supporters all deserve a full accounting of exactly how that happened, and who was primarily to blame. It’s in the nature of institutions like boards of trustees that they are very good at protecting the guilty, but in this case the trustees have to come clean. No one will ever trust Cooper Union, or its trustees, or its president, unless and until such an accounting is made public. And, justice demands it.


While hindsight is always terrific, the need for at least a new engineering school building was very clear to me in 1998. At that time, I took a tour of the school with my two kids, who were looking at colleges at the time.

When we looked at the engineering school, unfortunately, I can only say that the facilities compared very poorly to those of Cooper’s peers. It looked like very little had changed in the 25 years since I graduated, and that made me very sad.

In the end, my kids ended up at Rose-Hulman and Carnegie Mellon. They would not even consider applying to Cooper.

I am very grateful that Cooper’s no tuition policy allowed me to get a degree that I am extremely proud of. But I also know that the world has changed and I would hope that the trustees and alumni would work together to make sure that the school’s finances are stable while also providing the top notch faculty, facilities and equipment that are needed to attract the very best students.

Posted by Ethan919 | Report as abusive

Felix Salmon smackdown watch, corporate-governance edition

Felix Salmon
Oct 18, 2012 06:10 UTC

Justin Fox is not a fan of the video where I take the Goldman Sachs board to task. Yes, he says, the Goldman board is packed with insiders and fails just about every rule of corporate governance — but so what?

There’s little or no evidence that the modern criteria for good corporate governance actually lead to better-governed corporations. What’s generally seen as the most important good-governance move of them all, pushing insiders off boards in favor of independent directors, may actually hurt performance. At least, that’s my reading of the voluminous academic research on the topic.

What’s more, says Justin, I’m wrong about the idea that the job of the board is to represent shareholders and to keep management under control.

As Cornell Law School professor Lynn Stout explains here, the board is actually responsible to the corporation, not its shareholders. And no, the shareholders don’t own the corporation — they own securities that give them a not very well-defined stake in its earnings, and the freedom to flee with no responsibility for the corporation’s liabilities if things go pear-shaped…

In the case of financial firms like Goldman Sachs, shareholders contribute only a small portion of the balance sheet and lenders (and taxpayers) are in many ways truer owners. Multiple studies have shown that it was financial firms with the most shareholder-friendly governance and executive compensation schemes that got into the most trouble during the financial crisis. That only makes sense — shareholders pocket the gains if big risk-taking pays off, but they aren’t on the hook when a bank collapses. Goldman’s relatively smooth sail through the crisis was in part the product of a governance culture that doesn’t put the short-term interests of shareholders first.

So who’s right, me or Justin? Easy: it’s Justin, completely, on this one. My video was a lazy recapitulation of this article by Eleanor Bloxham, and the opportunity to indulge in a bit of squid-bashing was just too juicy to resist. If Goldman Sachs fired its current bunch of muppets and replaced them with, say, the Citi board, or in any case a group of vertebrates, it’s not entirely obvious whether or how the bank would be improved.

Justin says that “a truly effective board” is “one full of committed, expert members who generally have a constructive, supportive relationship with management but are curious enough to keep digging into the company’s business and tough enough to take a stand when management begins to lose the plot”. Which sounds great, but risks being tautological: as he says, on paper, the HP board should fit the bill, and it’s been a complete and utter disaster. And in general, while it’s easy to spot bad boards, like HP’s, and utterly ineffective boards, like Goldman’s, it’s hard to point to boards which are particularly good. Often, good boards are like a good movie soundtrack: if the job is done well, it’s not noticed at all.

What’s more, great leaders neither want nor need great boards: they just want people who’ll get out of the way. After all, when boards do take matters into their own hands, they end up doing things like firing Steve Jobs from Apple. More generally, we’ve reached a level of CEO turnover these days which is clearly excessive: boards seem to be making up for their day-to-day spinelessness by panicking every so often and overreacting by firing the boss. Which rarely does much good.

One of the problems is that the job of directors is not well defined. Many of them think it has something to do with increasing the share price as fast as possible; almost none of them have clear roles like representing unions. In general, it seems, directorships are a nice prize you get for being Important; they can pay very well, but most of the time they end up going to people who don’t need the money. The real problem is not with any individual board but rather with the whole lot of them, as a group: they’re an insular group, made up largely of CEOs and former CEOs, and as such they tend to sympathize with senior management and pay those executives much more than they’re worth.

In the judicial system, juries are made up of randomly-picked members of the general public — and the jury system tends to work surprisingly well. I’m not saying that corporate boards should be chosen the same way. But I do think that the universe of potential board members is, as a rule, far too small. You want real diversity? Don’t put Dambisa Moyo on the board of Barclays. Put Cathy O’Neil on the board of Goldman. That would be awesome.



You got it right the first time. Goldman Sachs needs a corporate governance revamp. Here’s one more example of how screwed up the board is: Goldman has three key committees… audit, compensation and corporate governance/nominating. Each has the same 10 “independent” directors. The reason boards have committees is so that a few of them specialized in each area can delve in depth and report back to the board. Not so at Goldman.

A proxy access proposal is desperately needed to get new blood on the GS board.

Posted by Corpgov.net | Report as abusive

When bank boards flex their muscles

Felix Salmon
Oct 16, 2012 13:30 UTC

Vikram Pandit’s resignation might have come as a surprise to just about everybody, but the bank’s website seems to be fully updated: go to the board of directors page, and there’s Mike Corbat, CEO.

A couple of things are worth noting about that page. Firstly, Corbat is only CEO: he isn’t chairman as well. That would be Michael O’Neill, dubbed the “hands-on chairman” by the WSJ, who seems to be throwing his newfound weight around just seven months after taking on on the job. The rest of the board is reasonably impressive too: a good mix of independent thinkers from many walks of life. None of them can reasonably be considered to have been beholden to Pandit — and certainly none of them is beholden to Corbat.

That’s exactly as it should be. The CEO’s job is to run the bank, to answer to the board, and to get fired if he doesn’t perform. Which is what seems to have happened with Pandit.

Meanwhile, further downtown, the exact opposite is happening. Where Citi’s powerful board acted decisively after yet another set of weak results, Goldman’s powerless board is simply sitting back and watching their bank report a much more solid set of earnings. Just how powerless are they? Let me answer that for you:

Every day, on average, investors buy about $1.2 billion of Citigroup shares, and about $500 million of Goldman shares. Without that steady buy-side flow, the stocks — and the banks — would collapse. And while investors care about earnings first and foremost, they also want to know that they’ll ultimately receive those earnings, rather than just seeing them disappear into the pockets of management, or be wasted on silly acquisitions. Governance matters. And on that front, if on few others, Citi can credibly claim to be leagues ahead of Goldman.

As for Corbat, I have no idea how he will perform as CEO. But I can say that the choice of Corbat is clearly a vote for Citi’s global franchise. If Corbat cuts back anywhere, it will be domestically, in the US, rather than in the faster-growing regions of the world where the Citi brand remains strong. Much was made of the fact that Pandit was an Indian leading a big US bank, but in fact Corbat has more international banking experience than Pandit had. He’s also more wonk than visionary. Which is probably a good thing.


Speculators, I mean investors, are so used to getting little or no dividends they have forgotten why corporations even exist. It used to be to spread the burden of financing a company among many owners, but now they just exist as a vehicle for its management.

If the government stops the double taxation of corporate profits, publicly traded companies will have no excuse to not pay a reasonable dividend, and then there will be a great metric for those “investors” to judge performance.

Posted by KenG_CA | Report as abusive

Can Barclays be salvaged?

Felix Salmon
Jul 3, 2012 14:15 UTC

It’s easy to be rude about banks’ boards, and how they tend to be filled with tick-the-boxes types: the management consultant, the retired general, the business-school professor, and a bunch of “private investors” (or “people who inherited their money”, as they’re also known). And given its manifest incompetence over the past week, I clicked over to the list of Barclays board members fully expecting to see the same usual suspects — especially since the chairman, Marcus Agius, sounds like he really ought to have been born about 2,000 years ago.

But the fact is that the Barclays board is actually not bad, on its face. Yes, 10 of the 12 members are white men in their 50s or 60s. But if you were looking for a board which clearly understands issues in both finance and governance, I’d say that this lot was pretty good, compared to any US bank I can think of. Which makes it all the weirder how they managed to get such a spectacular amount of egg on their collective faces this week.

It was always a bit peculiar that Barclays’ chairman would resign while the CEO remained in place. “As chairman, I am the ultimate guardian of the bank’s reputation,” he said yesterday. “Accordingly, the buck stops with me and I must acknowledge responsibility by standing aside.” This of course begged the obvious question: was Bob Diamond, the CEO, somehow not a guardian of the bank’s reputation? And given that Agius’s main failures were in the way that he managed Diamond (or, more to the point, didn’t manage Diamond), how would Agius’s resignation with Diamond still in place help anything?

Today, it looks as though the board was attempting to sacrifice Agius — who had already said he was retiring next year in any case — in a doomed attempt to placate the UK’s parliament and media. Obviously, it didn’t work, and now we see an ignominious switcheroo: Diamond is out, along with COO Jerry del Missier, and Agius is back atop the board, looking for a successor.

“To state the obvious,” as Robert Peston says, “the impression has been created that this hugely important institution is not in charge of the basics of its destiny.”

Indeed, Peston reports that the decision to defenestrate Diamond was taken not by the newly-leaderless board at all, but rather by Mervyn King’s eyebrows. It’s surely right that when a board finds itself with a complete absence of testicular fortitude, top regulators have to step in to force the issue. But there’s something fishy here, too: Clive Horwood reports that at his scheduled testimony to Parliament tomorrow, Diamond was planning on blaming not himself for the Libor-fixing scandal, and certainly not Agius but rather — wait for it — the Bank of England. Which turns out to be the very institution which kicked him out, the day before he was due to testify.

The whole thing is incredibly messy and opaque, and will only serve to further damage Barclays’ reputation. Can that reputation be salvaged? I’m not sure it can: institutions the size of Barclays are hard to change, especially when a large cohort of their highest-paid employees used to work at Lehman Brothers. I very much doubt that any internal candidate could turn this ship around, and even a high-profile outsider — Bill Winters, perhaps — would find it incredibly difficult to take this peculiar beast and turn it into something comprehensible and manageable. Especially if he would be expected to raise the share price while doing so.

In the meantime, it seems that the newly-unemployed Diamond will still testify tomorrow; his departure today is unlikely to soften the blows from Britain’s parliamentarians. And given that Diamond’s resignation was clearly involuntary (Diamond pulled out of a Romney fundraiser yesterday “to focus all his attention on Barclays”), if anything he’s going to be more likely to veer off-message and start railing against those he blames for his own downfall. Who surely include Mervyn King. This is not likely to be an edifying spectacle, although it might be compelling in a car-crash kind of way.

I suspect the best bet for Barclays’ board and its new CEO, whoever that turns out to be, will be to get out in front of Vickers, and make a virtue out of necessity. Ringfence all the UK retail-banking operations and turn them into a boring utility. Then take everything else, including the whiz-bang traders and investment bankers, and list them as a separate company, most likely in the US, which can take on as much risk as its regulators allow it to. I believe the LEH ticker is still available.


Nobody is boycotting Barclays yet, as far as I know. Yet in the 1970′s, rather a lot of people boycotted them over their links to the apartheid regime in South Africa. They recovered from that – apparently so well that op-ed writers like Mr Salmon are unaware that it even happened, even if everyone in the population at large remembers it. Therefore, they can recover from this.

Posted by IanKemmish | Report as abusive

When shareholders topple CEOs

Felix Salmon
May 8, 2012 13:51 UTC

The Telegraph has dubbed it Shareholder Spring: in the UK, these days, CEOs are falling left and right after shareholders complain about their pay. First came David Brennan, the CEO of pharmaceutical company AstraZeneca, who decided to spend more time with his family after shareholders made it clear they wanted him out. Next up was Sly Bailey at publisher Trinity Mirror, who was also facing a shareholder revolt. Now it’s the turn of Andrew Moss, the head of insurer Aviva, who waited until after shareholders voted against his pay package before handing in his resignation.

Mark Kleinman notes something very interesting about the Aviva vote: while a majority of shareholders voted against Moss’s pay package, less than 5% actually voted against him staying on as chief executive.* The former vote, on pay, was non-binding, while the latter vote was binding — and clearly almost no shareholders had the appetite to actually fire Moss, even if that was what they ultimately ended up doing. In the UK, says Kleinman, “the effect of the pay vote was to leave Moss in an untenable position”. At the same time, says Helia Ebrahimi, “Man Group chief executive Peter Clarke is currently hanging by a gossamer thread after shareholders turned on his remuneration package”.

In the US, of course, none of this is true: Citigroup CEO Vikram Pandit is still comfortably ensconced in his position, despite clear shareholder rejection of his compensation package.

I suspect that what’s going on in the UK is a harbinger of what will happen, eventually, in the US. One can’t expect a perennially tone-deaf company like Citigroup to set the tone for corporate America as a whole — this is a firm, remember, which honestly thought the Fed would allow it to buy back $8 billion of its own precious equity. And if you don’t listen carefully to your regulators, you’re definitely not going to listen to your shareholders.

But as we see more pay package rejections in the US, I think that CEOs with cleaner ears will prove themselves capable of understanding the message being sent. After all, few shareholders vote no on pay with the thought process “I think you would be a great CEO, just as long as you earn a little bit less money”. These votes are a clear rejection of cronyism at the board level, and it behooves boards to start listening.

I might be dreaming, here, but in the age of Occupy, there’s a case to be made that boards are just a little bit more aware than they used to be that they answer to shareholders, and that the biggest shareholders — pension plans, mutual funds, that kind of thing — are ultimately representing the interests of the 99%. So long as the masses stand idly by, the plutocrats will happily award themselves ever more obscene quantities of money. But when shareholders notice and object, CEOs like Andrew Moss know that the gig is up.

*Update: Originally I said that more than 95% of votes were cast for Moss staying on as CEO, that’s wrong. Only 4.6% of votes were cast against him, but another 5% or so were withheld.