Public Markets at Risk of Shrinking Further, Says Jamie Dimon

The banking chief decried shrinking public markets, investor activism and other risks to investment markets in JPMorgan Chase’s annual CEO letter.

In 1996, the number of public U.S. companies peaked at 7,300. Today, that number stands at 4,300. In roughly the same period, the number of private companies backed by private equity increased from 1,900 to 11,200.

The total number of public U.S. companies over the past two decades “should have grown dramatically, not shrunk,” Jamie Dimon, CEO of J.P. Morgan Chase & Co, wrote in his annual shareholder letter, released on Monday.

The main theme of Dimon’s letter was that the U.S. is facing an uncertain geopolitical situation. Unrest is rising across the world, and the U.S. faces a challenge to its global leadership. While Dimon noted that the economy is resilient, and that Americans are expecting a soft landing, some risks remain.

Dimon noted that the U.S. economy is largely being driven by deficit spending and past stimulus. The need for significant investments in the energy transition and a restructured supply chain to service the energy transition could keep inflation and rates higher.

Dimon also wrote that the U.S. has never experienced this level of Quantitative tightening, which he writes is draining $900 million in liquidity from the system annually, of which Americans have never experienced the full effect of.

Nonetheless, it was a good year for JPMorgan, the firm recorded record revenues for the sixth year in a row. The bank posted revenues of $162.4 billion and net income of $49.6 billion.

Dimon thinks several factors are forcing public companies to go private or stay private, including governance issues, regulations, the focus on quarterly earnings, and shareholder activism.

“There are good reasons for private markets, and some good outcomes result from them. For example, companies can stay private longer if they wish and raise more and different types of capital without going to the public markets. However, taking a wider view, I fear we may be driving companies from the public markets,” Dimon wrote.

Dimon asked, “Is this the outcome we want?”

Pressure for Quarterly Earnings

Dimon warned that the pressure on companies to produce and focus on quarterly earnings can lead to bad decisions, and bad accounting. While Dimon wrote that detailed and disciplined quarterly reporting is positive, CEOs and company boards should resist the “undue pressure of quarterly earnings.”

Often, companies will take short-term measures to improve their earnings, like cutting costs at quarter end, or halting investments that although they may reap rewards in the long term, would show accounting losses in the near term.

“Once shortcuts like this begin, people all over the company understand that it is okay to ‘stretch’ to meet your numbers,” Dimon wrote. “This could put you on a treadmill to ruin. Obviously, a company should not resort to these tactics, but it does happen in the public markets — and it’s probably less likely in the private markets.”

Shareholder Activism and Proxy Advisory

Dimon’s greatest criticism targeted shareholder activism. “One of the reasons it is less desirable to be a public company is because of the spiraling frivolousness of the annual shareholder meeting,” he wrote.

Dimon denounced what he called the “undue influences” proxy advisors have on institutional investors, which could be at odds with their fiduciary responsibilities.

Dimon also criticized those in investing roles at institutions for not having as large of a role in shareholder proposals. He criticized the role of stewardship committees, groups at many firms which vote on and review shareholder proposals. According to Dimon, most of these committees are not made up of portfolio managers and research analysts, but stewardship experts.

“The reality is that many of these committees default large portions of what they do to proxy advisors and, more troubling, make it harder for actual portfolio managers to override this decision making,” Dimon wrote.

“Some have argued that it’s too hard and too expensive to review the large number of proxies and proxy proposals — this is both lazy and wrong. If issues are important to a company, they should be important to the shareholder — for the most part, only a handful of proposals are important to companies,” Dimon continued.