JP Morgan Chase 2005 Annual Report Download - page 141

JPMorgan Chase & Co. / 2005 Annual Report 139
Corporate Governance
Governance is a continuing focus at JPMorgan Chase, starting with the board
of directors and continuing throughout the Firm. There are three pillars of
good governance:
• An independent board, accountable to shareholders
• Strong internal governance
• Alignment with shareholders
Board governance
JPMorgan Chase’s board is experienced, independent and accountable to
shareholders. The board’s structure and practices include
the following, and
more information on board governance can be found on the Firm’s website
(www.jpmorganchase.com):
• effective size: The board’s preference is to maintain a smaller size for effi-
ciency and to encourage active dialogue. As retirements occur, the board
will actively seek to increase diversity among its membership.
• asuper-majority of non-management directors: There are only two full-
time management members on the board, Bill Harrison and Jamie Dimon.
During 2005, Bob Lipp became a part-time member of management to
share his special skills in developing talent within the firm. All other mem-
bers of the board are non-management directors that the board has
determined to be independent.
• director independence:
independent directors – Each of the non-management directors of
JPMorgan Chase was determined by the board to be independent in
accordance with board standards that consider past and current employ-
ment relationships; any business relationships with or charitable contribu-
tions to entities at which a director serves as an officer; and personal
banking and other financial relationships, which must be on an arm’s-
length basis.
executive sessions of directors – In 2005, the board adopted the practice
of meeting without management at each regularly scheduled board meeting.
access to outside resources – Although the main responsibility for provid-
ing assistance to the board rests with management, the board and board
committees can engage outside expert advice from sources independent
of management at the expense of the Firm.
• director accountability:
majority voting for directors – In 2005 the board adopted a policy provid-
ing that in uncontested elections, any director nominee who receives more
withheld than for votes will tender his or her resignation. Absent a com-
pelling reason, the board will accept the resignation.
• director compensation: The board believes it is desirable that a significant
portion of overall director compensation be linked to JPMorgan Chase
stock, and the board’stotal compensation includes approximately one-
third cash and two-thirds stock-based compensation in the form of share
equivalents that must be held until a director’s termination of service.
Internal governance
While governance begins with the board of directors, managing the enter-
prise requires effective governance structures and practices throughout the
organization. The firm as a whole manages by line of business, supported by
global policies and standards that typically apply to all relevant units regard-
less of geography or legal structure. The strength of these global control
processes is the foundation of regional and individual subsidiary governance.
Three examples of the Firm’s global processes and standards are its risk man-
agement structure, policy review process and codes of conduct.
Defined risk governance is a principle of risk management at JPMorgan
Chase. The board of directors exercises oversight of risk management through
the board as a whole and through the board’s Audit and Risk Policy commit-
tees. The charters of these and other board committees are available at the
Firm’s website. The board delegates the formulation of policy and day-to-day
risk oversight to management. The Firm’s risk governance structure is built
upon the premise that each line of business is responsible for managing the
risks inherent in its business activity, including liquidity risk, credit risk, market
risk, interest rate risk, operational risk, legal and reputation risk, fiduciary risk
and private equity risk. Each line of business has a risk committee responsible
for decisions relating to risk strategy, policies and control. Where appropriate,
risk committees escalate risk issues to the Firm’s Operating Committee, com-
prised of senior officers of the Firm, or to the Risk Working Group, a sub-
group of the Operating Committee. Overlaying risk management within the
lines of business are three corporate functions: Treasury, Risk Management
and Office of the General Counsel. Treasury is responsible for managing the
interest rate and liquidity profile of the Firm. Risk Management provides an
independent firmwide function of control and management of risk. The Office
of the General Counsel has oversight of legal, reputation and fiduciary risk. A
discussion of risk management begins at page 60 of this Annual Report.
The policy review process is based on the recognition that a firm’s success
requires maintenance of a reputation for business practices of the highest
quality. The Firm has a specific structure to address transactions with clients
that have the potential to adversely affect the Firm’sreputation. Primary
responsibility for adherence to the policies and procedures designed to
address reputation risk lies with business units, which are also required to
submit to regional Reputation Risk Committees proposed transactions that
may heighten reputation risk. The committees may approve, reject or require
further clarification on or changes to the transaction, or they may escalate the
review to the most senior level of review, the Policy Review Office. The objec-
tive of the policy review process is to reinforce a culture that ensures that all
employees understand the basic principles of reputation risk control and can
recognize and address issues as they arise. For a further description of the
policy review process, see the discussion of reputation and fiduciary risk start-
ing at page 80 of this Annual Report.
The Firm has two codes of conduct, one applying to all employees and a sup-
plementary code that applies to senior executive and senior financial officers.
The Code of Conduct is applicable to all employees and the Firm requires each
employee to certify annually his or her compliance with the Code. The Firm
also has a Code of Ethics for Finance Professionals to underscore the impor-
tance of ethical conduct and compliance with law,particularly as it relates to
the maintenance of the Firm's financial books and records and the preparation
of its financial statements. Both codes are available at the Firm’s website.
Alignment with shareholders
Good corporate governance requires that compensation policies align with
shareholder interests. JPMorgan Chase’s compensation policy for executive
officers emphasizes performance-based, variable compensation over fixed
salary and uses equity-based awards to align the interests of executive offi-
cers with shareholders. Members of the Firm’s Operating Committee are
required to retain 75% of the net shares received from equity-based awards,
after deduction for taxes and exercise costs.