12-15 page Slide show
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JPMorganChaseBender.pptxJP Morgan Chase: The Balance Between Serving Customers and Maximizing Shareholder Wealth
Penelope Bender
William Woods University
BUS 585: Integrated Studies in Business Administration
Dr. Leathers
Abstract
This paper investigates why JP Morgan Chase and other financial institutions struggle to balance client interests over maximizing wealth.
It is an exploratory study done through literature review.
Often financial institutions, like JP Morgan, put profits ahead of the interests of those they serve.
The paper contributes to better understanding of corporate culture.
This paper investigates why JP Morgan Chase and other financial institutions struggle to balance client interests over maximizing shareholder wealth. This exploratory study is done through a literature review to answer why financial institutions, specifically JP Morgan, often put profits ahead of those they serve. The study will provide evidence of the complex nature of balancing client interests over maximizing shareholder and individual wealth and the need for tighter internal and external oversight. This paper contributes to a better understanding of why corporate culture encourages profit over stakeholders’ interests.
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Research Question
Why does JP Morgan Chase and other financial institutions struggle to balance client interests over maximizing shareholder wealth?
Employees of JP Morgan Chase and other large banks work in their best interests to increase wealth and succeed by meeting management goals. However, because of the complex nature of large banks, an individual(s), unethical behavior can go unchecked.
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Problem Statement
JP Morgan Chase competes globally and faces competition from other large banks in the US and abroad.
JP Morgan Chase is part of a complex system of regulation, self-interests, and wealth creation.
The interests of shareholders and investors is sometimes overshadowed by agents working in their own best interests.
Financial markets are a complex web of interests, and because of opportunities for individual profits, regulating individual’s actions without stricter regulations and internal oversight is impossible.
The study is not meant to be a moral or ethical analysis but merely why the complex relationship exists and will continue to exist in capitalist society. This paper contributes to a better understanding of why capitalism or financialism’s (Clarke, 2014) fundamentals encourage wealth creation. Financial markets are a complex web of interests, and because of opportunities for individual profits, regulating individual’s actions without stricter regulations and internal oversight is impossible.
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Literature Review
The literature review showed a connection between self-interests, regulators, competition, and risk, which all lead to a complex system of conflicting agendas.
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How Self-Interests Influence Behavior
Ross (1973) explains that all employment relationships are agency relationships and moral hazards are generally due to such relationships.
In an SEC case against JP Morgan Securities (JPMS), JP Morgan acknowledged violating federal securities laws from January 2018 to November 2020, allowing traders to communicate about securities through a texting app, WhatsApp, and personal emails.
Corporate governance theory explains how leverage influences agency costs and firm performance (Berger & Bonaccorsi di Patti, 2006).
There are always conflicting goals within an organization, but the problem is when the individual’s goals (because of compensation packages) become part of the institutional culture. It becomes a “theory of relationships embedded in social structures featuring social norms” (Mitnick, 2021).
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Financial Standards and Regulations
The financial crisis was during deregulation resulting in devastating losses and economic upset.
Born (2011), who served on the Financial Crisis Inquiry Commission (FCIC), believes the support for self-regulating reforms caused the risk in the financial system.
Lobbying by large financial institutions affects regulations.
Lambert (2017) found that 44.7 percent of regulators do not seek enforcement against banks that lobby.
Lobbyists have influenced the effects of the Dodd-Frank since it was passed in 2010. Ban and You (2019) studied lobbying regarding the Dodd-Frank Act. Their findings support other research by Lambert (2017) on their influence on policymakers. They found that the number of meetings with the SEC and lobbying reports were positively correlated to citations on the final rules.
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How Competition Affects the Financial Markets
Competition often reduces banking stability by “squeezing profits,” increasing pressure on banks’ to make risker decisions to increase profit (Corbae & Levine, 2018).
Another study by Degl’Innocenti, Fiordelisi, Girardone & Radica (2019) also found evidence supporting competition leading to the fragility in the market.
Bannier, Feess, and Packham (2013) studied how executive compensation and competition in the market for such talent increased excessive risk-taking beyond the interest of the board and its shareholders.
When risk-taking is rewarded because of talent competition, it results in excessive risks to the market. Employees in this category have a more significant stake in the company and may feel privileged to make their own rules. For example, this happened when managers of JP Morgan Chase allowed employees to use “WhatsApp” to evade regulators (Franck & Son, 2021).
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Risks to the Financial Market
Research done by Erturk (2016) argues that no amount of regulation will safeguard against risk until the shareholder value business models are changed.
Bell and Hindmoor (2017) did a study focusing on the information before 2005 and after (up to 2015) and found that although regulation controlled leveraged financial trading, it has not changed the dynamics of the banking industry.
The board of directors and the CEO are at the center of controlling internal risk.
The board’s role is to ensure “bank stability by monitoring executives” and controlling unnecessary risk-taking (Srivastav & Hagendorff, 2016).
Boards have an influence on executive behavior and have control of that behavior through compensation structure. For example, research shows that after deregulation, US bank boards created compensation packages with “option-based equity incentives to encourage risk-taking” (Srivastav & Hagendorff, 2016). To control risk-taking and encourage long-term growth, boards could tie compensation to incentives that encourage bank stability.
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Methodology
This paper’s analysis is based on written sources.
It covers four areas: agency theory behavior, regulations (external and internal), competition and economic risk.
It looks at JP Morgan and other large financial institutions' unethical and illegal actions to make sense of the complex relationships.
Explores why regulators are unsuccessful at controlling risk.
Explores how competition affects the actions of financial institutions.
Finally, looks at how actions pose risks to the economy.
Traders are often motivated by self-interest to concentrate on short-term profits and personal wealth creation. Jasper et al.(2005) talks about the tensions between individuals’ strategies (opportunism) and institutional control (restraint). Corporate governance theory explains how leverage influences agency costs and firm performance (Berger & Bonaccorsi di Patti, 2006).
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Results
This exploratory study provides evidence of the complex nature of balancing agents’ and principals’ interests.
This analysis found conflicting goals between regulatory agencies and corporate governance.
Regulatory agencies aim to control risk and protect the economy from a financial crisis, which conflicts with the shareholder management model that aims to increase equity and share price.
Research by Srivastav and Hagendorff (2016) discusses the need for additional risk management. To reduce risk in times of crisis, we should design reforms to increase the probability that the real economy remains insulated (Geithner, 2017).
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Discussion
This research can help to better understand the complex nature of the financial industry, regulatory agencies, corporate governance, and risk.
Managers can benefit from understanding the importance of corporate governance to control internal risks and corporate culture.
The gap areas of this study was posed by the amount of current research available on agency theory and corporate governance in banking.
Future research should focus on addressing internal governance and regulatory policies that deter illegal actions and promote long-term stability in the market.
The literature review shows the complex nature of banking and the risks of deregulation and competition. This paper reviews prior work and gives insights for further research on agency theory, governance, competition, and risk management. The number of academic studies on banking limited the scope of this paper
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Conclusion
The research shows the need for stronger external and internal regulations in financial institutions.
Failures in the banking system have a ripple effect throughout the economy.
Banks have government guarantees which may increase risk-taking (Srivastava & Hagendorff, 2016).
Governance is necessary to control the risks.
This paper aims to understand the complex nature of the financial industry, the underlying culture of wealth creation, regulatory struggles, and economic risks. After the financial crisis, it was clear that banking regulations were insufficient to control risk and that deregulation and self-governance were inefficient. The research shows the need for stronger external and internal regulations, a change in the corporate culture, and penalties that deter illegal actions.
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Works Cited
Ban, P. & You, H. Y. (2019). Presence an influence in lobbying: Evidence from Dodd-Frank. Business and Politics. 21(2), 267-295. https://www.cambridge.org/core/journals/business-and-politics/article/presence-and-influence-in-lobbying-evidence-from-doddfrank/C75E6EFC1109A84676EF6ABD0B2BC588
Bannier, C., Feess, E., & Packham, N. (2021, February 27). Competition, bonuses, and risk-taking in the banking industry. Review of Finance, 17(2), 653-690. Https://doi.org/10.1093/rof/rfs002
Batson, C. D. & Thompson, E. R. (2001, April). Why don’t moral people act morally? Motivational considerations. Current Directions in Psychological Science, 10(2), 54-57
Bell, S. and Hindmoor, A. (2017). Are the major global banks now safer? Structural continuities and change in banking and finance since the 2008 crisis. Review of International Political Economy. ISSN 0969-2290 https://doi.org/10.1080/09692290.2017.1414070
Berger, A. and Bonaccorsi di Patti, E. (2004). Capital structure and firm performance: A new approach to testing agency theory and an application to the banking industry. Journal of Banking & Finance, 1065-1102
Only references from this paper have been included. A complete list of references is at the end of my thesis.
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Works Cited
Borch, C. (2016). High-frequency trading, algorithmic finance, and the Flash Crash: Reflections on eventalization, Economy and Society, 45(3-4). 350-378, https://doi.org/10.1080/03085147.216.1263034
Born, B. (2011). Foreword: Deregulation: A major cause of the financial crisis. Harvard Law & Policy Review, 5(2), 231-243.
Bradshaw, C. (2020). Credit rating agencies: regulation and liability. Lewis & Clark Law Review, 24(4), 1489-1526.
Chen, J., Zhang, H. Xiao, X, & Li, W. (2011). Financial crisis and executive remuneration in banking industry: An analysis of five British banks. Applied Financial Economics, 21(23), 1779-1791. https://eds-p-ebscohost-com.wwu.idm.oclc.org/eds/detail/detail?vid=2&sid=931d8bac-1e06-4efa-b792-1be9fc77e84a%40redis&bdata=JnNpdGU9ZWRzLWxpdmU%3d#AN=64853456&db=buh
Clarke, T. (2014, March). The impact of financialization on international corporate governance: the role of agency theory and maximizing shareholder value. Law and Financial Markets Review.8(1), 39-51. https://eds-s-ebscohost-com.wwu.idm.oclc.org/eds/detail/detail?vid=6&sid=544ded74-c955-4ff4-8ddc-ac62e7a7073f%40redis&bdata=JnNpdGU9ZWRzLWxpdmU%3d#AN=95697283&db=asn
The references from this paper are too long for the presentation, therefore, only works cited in the presentation are included.
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Works Cited
Clayton, N. (2015). Failures in the prudential regulation of banks in the UK and US: Will the lessons be learn? Law and Financial Market Review, 9(2), 130-153.
Corbae, D. & Levine, R. (2018, September 14). Competition, Stability, and Efficiency in Financial Markets. https://faculty.haas.berkeley.edu/ross_levine/Papers/JH091418.pdf
Dowd, K. (2009). Moral hazard and the financial crisis. Cato Journal, 29(1), 141-166. https://eds-p-ebscohost-com.wwu.idm.oclc.org/eds/pdfviewer/pdfviewer?vid=33&sid=2095a84d-21ae-4adb-832b-9970e0562211%40redis
Erturk, I. (2016). Financialization, bank business models and the limits of post-crisis bank regulation. Journal of Banking Regulation. 17(1/2), 60-72.
Geithner, T. F. (2017). Are we safe yet? How to manage financial crises. Foreign Affairs, 96(1), 54-72.
He, W. P. (2012). Banking regulation in China: What, why, and how? Journal of Financial Regulation & Compliance, 20(4), 367-384. https://doi-org.wwu.idm.oclc.org/10.1108/13581981211279336
Hill, C. & Jones, T. (1992, March). Stakeholder-Agency Theory. Journal of Management Studies, 29(2), 131-154.
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Works Cited
Hindmoor, A. & McConnell, A. (2013). Why didn’t they see it coming? Warning signs, acceptable risks, and the global crisis. Political Studies, 61, 543-560.
Jasper, J., Abolafia, M. & Dobbin, F. (2005). Structure and Strategy on the Exchanges: A Critique and Conversation About Making Markets. Sociological Forum, 20(3), 473-486.
Jensen, M. C. & Meckling, W. H. (1976). Theory of the Firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305-360.
Menand, L. (2018). Too big to supervise: The rise of financial conglomerates and the decline of discretionary oversight in banking. Cornell Law Review, 103(6), 1527-1588.
Mitnick, B. (2021). The theory of agency redux. Academy of Management Discussions, 7(2), 171-179.
Ross, S. A. (1973). The Economic Theory of Agency: The Principal’s Problem. The American Economic Review, 63(2), 134-139.
Srivastav, A. & Hagendorff, J. (2016). Corporate governance and bank risk-taking. Corporate Governance: An International Review, 24(3), 334-345.
Zeidan, M. J. (2012). Effects of illegal behavior on the financial performance of US banking institutions. Journal of Business Ethics, 112(2), 313-324.
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