Letter #64: Jamie Dimon (2001)
Chairman and CEO of JP Morgan | 2000 Bank One Shareholder Letter
Hi everyone! Due to popular request (and a few persistent individuals), I’ll be restarting this newsletter, but with a few changes. Most notably, rather than sending “A Letter a Day”, I’ll be sharing a letter or transcript twice a week, once on Tuesday afternoon (2:22pm) and once on Saturday morning (6:06am). Second, I’m expanding the scope of the newsletter to include a broader range of subjects, but still focused on thought-provoking investors (across venture, hedge funds, and private equity), founders (not just tech), and operators (sales, marketing, product, etc.). Lastly, I’ll be limiting my commentary so it’s a smoother reading experience and you can read the work as is. (If you’d like to see my notes or trade thoughts, shoot me a DM on Twitter!)
Today’s letter is Jamie Dimon’s first shareholder letter as the CEO of Bank One. At the time, Bank One was the fifth largest bank in America, but was struggling to the point that they had dismissed their CEO (who was a third generation CEO after his father and grandfather having led the bank, no less!). After leading a turnaround at the bank, Bank One was acquired by JP Morgan, where Jamie became COO, and a year later, CEO.
This letter is particularly interesting for many reasons, including it being his first letter as the CEO of a major corporation, kicked off a turnaround, and much more. He clearly communicates the philosophy of the bank, explains their businesses with regards to the hallmarks of a good business, and lays out concrete steps to improve the company. Additionally, reportedly, Jamie’s Bank One letters were the letters that caught Warren Buffett’s eye, and led to them becoming friends, with each recommending reading the other’s letters on a regular basis.
I hope you enjoy this letter as much as I did!
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The Letter
DEAR FELLOW SHAREHOLDER
Bank One, confronting daunting challenges, had an extremely difficult year in 2000. We lost $511 million after taking $5 billion in charge-offs, reserve additions, write-downs and various adjustments. We reduced the dividend by 50 percent — something no corporation should ever have to do. We faced management changes, customer service problems, litigation, incompatible computer systems, costly and inefficient operations and a rapidly deteriorating credit climate. These results are absolutely unacceptable — to you and to Bank One’s management.
After you read this letter, I hope you’ll see concrete reasons for optimism. The most important are these: This company has strong franchises and a solid core; we’ve got good market positions; fine, albeit underperforming, businesses; and excellent products and services. As a result, we did not have to resort to radical restructuring to restore the company to health. Yet, we did make many tough decisions. We did what we believed was right and in the best long-term interest of our company. Now that we have put a significant portion of our problems behind us, we enter 2001 a much stronger company.
Since this is my first letter to you, I’d like to tell you about the principles that guide us and then note some of the actions we have taken to revitalize Bank One. You’ll find information on Bank One’s major businesses elsewhere in this report and in expanded detail in the 10-K.
As we move ahead with Bank One’s turn around, we can’t promise you specific outcomes or risk-free results. But here’s what we will promise you:
We will share with you the truth, and offer honest assessments of our businesses and our prospects.
We will relentlessly follow our business principles.
We will act with integrity and honor.
We will always try to do the right thing, not the easy or expedient thing.
We will work hard and with fierce resolve to make this a company of which our shareholders, employees, customers and communities can be proud.
Our priorities are to:
BE FIELD AND CLIENT DRIVEN
True customer orientation means acting in the customer’s best interest, by offering great products and services — not once in a while, but all the time. It also means being highly responsive, courteous and quick to follow through on promises. It re quires adopting an outward, not an inward focus, thinking and responding to the competition. It re quires always worrying about the competition. We want to in fuse that keen awareness into every part of the organization. The field should drive the process, and staff employees in their important support roles need to always remember they are there because of the field; they need to be lean, knowledgeable and extremely responsive.
We have begun to dramatically improve customer service through a variety of actions and sweeping systems enhancements. This renewed customer focus is starting to pay off. As an example, we’ve put advanced technology, including Internet-enabled PCs, into all of our banking centers, giving our people in the field far better access to information that helps them serve our customers. Our field people also have much more authority and accountability. We also have started a lot of new initiatives because of our new online “suggestion box,” where we have received more than 6,000 ideas from employees, who know the most about the company. By most measures, customer problems are down dramatically and service levels are up substantially. We have made substantial progress, but we know we still have a way to go to be the best in class.
SET THE HIGHEST STANDARDS OF PERFORMANCE
It’s up to each company, each leadership team and each individual to set their own standards of performance. Ours will be the highest. We will not shy away from comparing ourselves to the best companies, knowing that often we’ll come up short. Striving to be the best motivates us to seek constant improvement.
Toward that end, we take corporate governance seriously. Our Board has reviewed its own governance and adopted best practices as to how it will conduct itself. This led us to reduce the size of the Board, while adding two outside directors with considerable expertise. A smaller Board helps create more active dialogue and a thorough and open review of all our issues, whether they are strategic, risk or management related.
SET THE HIGHEST STANDARDS OF INTEGRITY
In business, as in every other arena, ethical behavior doesn’t just happen. It has to be cultivated and repeatedly affirmed throughout the organization. At Bank One, acting with integrity is a paramount expectation. It applies to every aspect of our company, including compliance, employee relations, marketing and sales.
Maintaining the highest standards of integrity involves faith fully meeting our commitments to our customers, to fellow employees, to the Board, to you our shareholders and to all of our other partners. Every commitment we make should, and will, be sacrosanct.
BUILD FOR GOOD AND BAD TIMES
A mark of an exception al company is consistently good performance relative to that of its competitors, regard less of economic conditions and competitive threats. We want Bank One to be that kind of company.
As you know, there’s been a considerable slowdown in the economy, and no one can say with assurance where it’s headed. While we have great confidence in the American economy, we also prepare for its occasion al unpredictable volatility. Our obligation is to build the company so it can thrive in any environment. The best companies capitalize on their strength to grow aggressively in downturns, when their competition is unable to do so.
To help us with stand economic downturns and competitive pressures, we’ve taken a number of strong steps, which I will continue to highlight.
CREATE A FORTRESS BALANCE SHEET
In 2000, we fortified Bank One’s balance sheet by:
Scouring the balance sheet, to thoroughly understand our assets and liabilities; to make sure that someone is accountable for them; to use conservative, economically appropriate accounting; and to have strong financial controls.
Strengthening loan loss reserves. For example, we began 2000 with reserves attributable to loan losses of 1.4 percent of loans — by some measures, the weakest in the industry. During the year we added almost $2 billion to reserves, to end 2000 with loan loss reserves to loans of 2.4 percent — among the industry’s strongest. While this reserve addition was needed to address the deteriorating credit environment, we’ve strengthened our relative position.
Achieving strong capital ratios. We also ended the year with a tangible-equity to managed-assets ratio of 5.5 percent and Tier 1 capital ratio of 7.3 percent — both considered to be strong capital ratios. We expect these ratios to improve even more in 2001.
Maintaining strong credit ratings. We are grateful that we were able to take all of the actions we did and avoid a downgrade. We are com mitted to maintaining strong credit ratings; in fact, we’d like to improve them over time.
Generating capital and flexibility. Cutting the dividend, as tough as that decision was, has greatly enhanced our capital retention. It has allowed us to reclaim our ability to actively decide what to do with our capital. By the end of this year, we anticipate that we’ll be generating substantial excess capital. And we will try to deploy it wisely and in the shareholders’ best interest, whether by retaining it, investing in our businesses, acquiring other businesses or buying back our stock.
ACHIEVE AND MAINTAIN GREAT FINANCIAL DISCIPLINE
Financial discipline is the bed rock of a healthy and growing company. We need to understand our business in excruciating detail. This means:
Great reporting and management information systems, resulting in financial and operating reports that are comprehensive, comprehensible and transparent; and management reports that are frequent, precise and detailed. We have also tried to enhance our disclosures to the business and financial community.
Meaningful profit and loss statements. We’ve created more than 2,000 profit and loss statements, including one for each banking center. These will help us make decisions based on fact, allocate capital appropriately and properly compensate based on performance. There will be one set of numbers inside and outside the company, so there can be no disputes about how any unit has performed.
Together, these actions should lead to high-quality earnings that:
are increasing, recurring and predictable in nature,
yield high returns on capital,
produce good margins, and
have reason able risk relative to the capital deployed.
These financial disciplines will give us the tools, in formation and knowledge that we need to be a great company.
Reducing credit risk. It’s appropriate here to comment on our corporate credit exposure, particularly in light of a deteriorating credit environment. Based on our analysis, our company has taken too much overall credit risk, has assumed too many big individual risks, and has experienced low returns relative to the capital deployed. Credit has often been a loss leader for commercial banks — a situation that is acceptable if risks are appropriate and if other revenue sources make up for the loss leader. Therefore, we intend to reduce our individual and gross aggregate credit risk, while trying to win more business from our customers to justify the risks that we do take. We expect this to reduce commercial exposures on and off the balance sheet by $10 billion to $20 billion and free up capital that has been earning low returns.
It’s important to understand that our goal isn’t to reduce the size of our business, but to achieve better returns and create a healthier business. While some of these changes are institution ally and culturally difficult, we will exit unprofitable relationships relentlessly, albeit carefully and respectfully. This action will enable us to develop stronger, deeper and more meaningful relationships with our customers over time.
We also expect and are prepared for several quarters of commercial credit costs at a rate at least double that of the approximately 40 basis points experienced in the last several years. To put these numbers into historical perspective, the 40 basis points is a cyclical low. Although the level expected for the next several quarters would be considered higher than normal, in a deep recession, commercial costs can run as high as 1 7 5 basis points. While none of us would like the impact on our earnings of a recession, because of all the steps we have taken we are now prepared to weather even that kind of environment.
BUILD A SOLID INFRASTRUCTURE
Great companies — profitable companies — consistently build their infrastructures. They strive for the best systems and back-office operations. They are highly efficient, they cut waste constantly and they invest continuously.
Bank One must be a low-cost producer by eliminating unnecessary costs wherever we find them. In 2001, we will have cut $500 million in wasteful spending from our operations, after investing hundreds of millions of dollars in our businesses. We have reduced our total overhead, net of investments, by $500 million. This waste cutting has not hurt our company’s performance or customer service. In fact, it has enhanced our operations by eliminating unnecessary, redundant and bureaucratic behavior.
We have reduced head count by 8 percent, from 87,700 to 80,800, mainly through attrition and selective staff reductions. Our remaining employees are more productive, and potentially happier and better rewarded. Yet our cost structure, though greatly improved, is still too high. We must continue to reduce it.
We’re creating effective systems and efficient operations. As examples, we’re aggressively consolidating, streamlining, standardizing and centralizing our back-office activities. In addition, we are collapsing our 20 major bank charters into three and integrating our computer systems. We have four major conversions to do, and we hope to complete two by the end of this year. While these actions will cost us roughly $150 million a year for the next several years, they are critical. Converting to uniform operating systems — and doing it quickly — will help us run our businesses more efficiently, provide better customer service and put us in a strong position to aggressively grow internally or by acquisition. Ultimately, it should save Bank One hundreds of millions of dollars a year.
Centralizing operations does not mean consolidating authority. We won’t be doing the latter. Instead, we’ll be providing the field with better products and services at a cheaper cost. These changes will enhance our ability to push more authority and decision making to the field.
We are making substantial technological and other investments for the future. No company has ever had much of a future by cutting costs alone. Success is measured by top- and bottom - line growth. So we’re investing substantially in our businesses to increase our market share, revenues and profits. Our retail service efforts, banking center platform, e-commerce products and expanding capital markets activities are just some of the areas receiving added support. Also, the importance of technology (here we include the Internet) cannot be overemphasized. We believe it will be critical in the financial services business, and, therefore, we need to embrace it and integrate it into everything we do. We need to continually strive to give our customers more, better, faster and cheaper. Technology, in all of its forms, allows companies to do this as they gain the benefits of economies of scale.
EXECUTE SUPERBLY
As important as strategy is, we need to improve our execution, because without it, we will surely fail. Execution involves every employee, every phone call and every contact we have with customers. It is the devil in the details. We’ve got to execute or we will fail. And we will execute, by:
Acting with greater urgency and speed. One thing that has kept us from moving fast is bureaucracy. We still have too much of it at Bank One, and we will eradicate it. Bureaucracy, silos and politics are the bane of large corporations; they must be combated vigorously and continually. Fast and lean is the antidote to creeping bureaucracy. We’ll continue to de-layer the organization and empower employees at all levels.
Becoming much more disciplined, which means meeting all of our commitments. Without discipline, mediocrity rules.
Giving ample resources and authority to the field, because that’s where we interact with our customers. We need all of our banking center managers and business heads to feel and act like they are the president of their own company.
Remembering that our businesses are highly interrelated and field based. Each unit’s success depends on the success and contributions of the others. Our strength resides in our regions; therefore, regional teams of senior executives from each business are driving our effort to improve customer service and revenues at the local level.
Communicating effectively and often. Real teamwork demands nothing less. In addition to urging employees to share best practices across the company, we need to be brutally honest with ourselves and foster open debate about what we do well, what we don’t do well and what we can do better. Problems don’t age well; denying or hiding them guarantees that they will get worse.
Treating fellow employees as customers. At Bank One, everyone counts, and we’ve got to remember that we support one another. Above all, it means doing what’s right for Bank One, even if we have to make unpopular decisions and forgo near-term rewards. We all need to earn each other’s respect every day.
CREATE A GREAT TEAM AND WINNING CULTURE
Eventually, it all comes down to our people. Building a great team and developing deep “bench strength” are requisites for any company’s long-term performance. One of our biggest priorities of 2000 was to assemble an exception ally capable group of leaders by adding talented executives from outside Bank One and by promoting the deserving from within. We believe that we have done that. Of the top 12 executives who now make up the senior management team, six are new to the company and six come from within the company — three recently promoted to their jobs. This process of seeking out the best individuals for the job is happening throughout the organization, and I believe we are well on our way to having a world -class management team.
Creating a meritocracy. Managers and employees perform best when they’re motivated, challenged and rewarded for doing the right thing. And companies perform best when shareholder, management and employee interests are aligned. We’re seeking that alignment in a number of ways. For one thing, we are trying to establish a true meritocracy. Employees will be rewarded for their efforts and contributions. We want employees to contribute in any way they can. Some employees’ contributions go far beyond the P & L, and hopefully we will have the insight to reward people for the “soft” things they do to help the company, like recruiting, mentoring or simply having the courage and character to stand up for what is right.
You have to get incentives right. We want employees to think and act as owners by offering them an appropriate stake in Bank One’s financial performance. We’re modernizing compensation to make it fairer, simpler and more performance based. (With our new P&Ls, we are able to do that.) And in the spirit of these principles, we’ve eliminated most entitlements, special perks and special deals. Compensation will follow performance, not titles. Done right, our new incentive plans will create the proper balance of individual and collective accountability. We want our people to make more money, but only if the company performs. Ultimately, we would love to be the leanest, best performing and highest paying company.
It starts at the top. Your senior management received no bonuses for the year just ended. All of the Planning Group members, including those with guarantees, decided it was appropriate to give them up. This company cannot and will not pay the senior people more when the company does worse. Now we will be the first to sacrifice, as is appropriate. The higher the manager, the more his or her compensation will be tied to the company’s performance — no excuses. Leadership is an honor, a privilege and a responsibility to do the right thing and set the right example.
It should include everyone. We made changes to the employee 401(k) and other benefit plans — not just to save money but, more important, to encourage greater stock ownership and long-term commitment to the company. The company match for 401(k) participants is now in Bank One stock. While we have reduced the company match (and eliminated it totally for highly paid individuals), we have added an outright grant of $300 (which we hope to increase as our performance improves) for lower paid individuals who probably did not have enough money to invest in the 401(k) and get the match in the first place. We believe this will add 15,000 of our employees to our shareholder ranks, bringing the total number of employee shareholders to approximately 60,000.
The 2001 stock option awards were spurred by the same principle. They were granted to more people and are based more on performance than on position. We also lengthened the vesting period of all new options from two years to five years. Simply put, we want the most benefits to go to our highest performers who stay to make Bank One a great company.
IN CLOSING
Bank One, like all other companies, was built on the shoulders of those who came before us, and we are grateful to all of our retired employees and directors for their service to this company. In particular, we would like to express special appreciation to Verne Istock, who retired in September as President after 35 years. We also want to welcome our newest Board members Heidi Miller and David Novak to our company. We believe that we have started on the path to make Bank One a company that our customers, shareowners, employees (current and former) and communities can be proud of.
I especially want to thank our 80,000 employees. They’ve made Herculean efforts to turn this company around and to build the platform for enduring success. I’m delighted and honored to work with them, and I am confident that working together we can build Bank One into one of the best financial services companies in America.
Yours truly,
James Dimon
Chairman and Chief
Executive Officer
February 20, 2001
Wrap-up
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