Last week, Jamie Dimon, the chief executive of US investment bank JP Morgan, announced that he has throat cancer.
Apparently the prognosis is good, and the condition is curable. But almost as soon as the news came out, pundits queued up to talk about about what this means for the global investment bank. Shares in the company also fell.
You might think this is in bad taste. After all, it seems a bit cold to talk about shares when someone has been diagnosed with a serious illness, whatever the prognosis.
However, it does illustrate the importance that investors attach to the person at the top of a company. Indeed, some even argue that the person leading a firm is the single most important factor in its success, more important than the economy or industry.
But how accurate is this view? How much does management really matter? Let’s have a look.
Cult of the celebrity chief executive
The traditional view, one that was very popular in the 1990s, is that the chief executive is critical to a company’s success. While shareholders are the legal owners of firms, most of the big institutions that control significant blocks of shares are content to sit back and let senior management take all the decisions.
Even where performance is poor, most of these institutions would rather simply sell their shares than attempt to engage with management. This leaves the chief executive (and possibly the chairman) in charge of strategy, as well as day-to-day management.
Supporters of this view point to the impact of leaders such as Jack Welch at General Electric and Steve Jobs at Apple. Indeed, Apple is seen as the classic case study of how change at the top can make or break a firm.
Jobs’ story is well known. He founded Apple in the 1980s, was pushed out in 1985, went on to enjoy success with computer company NeXT and animation group Pixar, then rejoined a struggling Apple in 1997.
From that point until 2011, when he was forced to step down due to the cancer that would kill him only weeks later, Jobs took Apple from near-bankruptcy to being the largest listed company in the world.
Since then there have been concerns that his successor Tim Cook has done little to continue Apple’s momentum, putting the firm at increasing risk of being overtaken by competitors like Google.
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Steve Jobs is the exception, not the rule
However, the ‘cult of the CEO’ is almost certainly overblown. Truly exceptional leaders are extremely rare – which is why Jobs’ story looms so large in our minds. If every CEO was like Steve Jobs, most of us wouldn’t have heard of him, because he wouldn’t stand out so much.
And plenty of celebrity CEOs have ended up falling flat on their face – showing that it’s very hard to distinguish good performance from luck. For example, just before the financial crash, Dick Fuld of Lehman Brothers and Hank Greenberg of insurer AIG were feted. Most notoriously, Ken Lay, chief executive of energy giant and massive fraud Enron, was lauded before his empire proved to be a sham.
Even when a CEO is genuinely successful, there are usually other people who deserve a large share of the credit. In the case of Apple, there was Jonathan Ives, who came up with the designs for many of their key products.
Research also backs this up – suggesting that while the CEO has some impact on a firm’s performance, it isn’t that significant. For example, a 2001 study by Harvard Business School looked at the factors affecting performance in 532 firms across 42 industries. They estimated that less than 15% of the difference was down to the CEO. In their view, the economy and the industry backdrop had a far bigger impact.
JP Morgan offers little value
So in most cases, the CEO is not a major factor in the valuation of a company. And while Mr Dimon has made some good decisions, and we wish him a speedy recovery, from a shareholder point of view, he’s not up there in the Steve Jobs league.
JP Morgan was able to repay the government’s bailout money quickly, and was smart enough to use the crisis to pick up Bear Sterns on the cheap in 2007 and do the same with Washington Mutual in 2008. But a failure to get indemnity against lawsuits stemming from the bad behaviour of these companies leading up to the crisis left JP Morgan with an expensive legal bill.
And other scandals, such as the alleged failure to spot the Bernie Madoff fraud in a timely fashion, and the ‘London Whale’ rogue trader, have made Dimon look a lot more fallible. Taking all the fines together, JP Morgan has had to pay a total of $25bn in the last two and a half years.
In any case, we don’t think JP Morgan’s (NYSE: JPM) shares offer much value right now on a Cape (cyclically-adjusted price/earnings ratio) of 15. While this is lower than for the US market as a whole, it doesn’t look spectacularly cheap for a bank, especially once you take into account lingering legal issues.
If you’re interested in buying a bank, take a look at my colleague James Ferguson’s most recent MoneyWeek magazine cover story on the British banking sector – if you’re not already a subscriber, you can get your first four issues free here.