In a 2010 article in the Texas Law Review entitled “Embattled CEOs”, Professors Marcel Kahan and Ed Rock argued that, over the past decade or so, CEOs of US public companies have gradually been losing power to their boards and their shareholders.  In their view, the days of the “imperial CEO” are now numbered.  In early 2013, the growing tension they identified between CEO and board power was on display at two major corporations in different continents – J.P. Morgan Chase & Co in the United States and Rio Tinto in Australia.

At J.P. Morgan on January 15, 2013, Jamie Dimon, whom many would regard as the embodiment of an imperial CEO, received the news that members of the board of directors had unanimously voted to halve his annual compensation from US$23.1 million in 2011 to US$11.5 million in 2012, through cuts to his bonus.  The board revolt was, it seems, led by the Chairman of the Compensation Committee, Lee R. Raymond, a retired Chairman and CEO of Exxon Mobil Corporation.  The compensation guillotine fell at J.P. Morgan in direct response to trading losses arising from the so-called “London Whale” debacle, involving complex credit derivative trades in the firm’s London chief investment office.  The losses, which were first announced in May 2012, are currently estimated to total around US$6 billion.

Meanwhile, in Australia, an even more dire fate was awaiting Rio Tinto’s New Jersey-born CEO, Tom Albanese.  Rio Tinto, which has dual listings in Australia and the United Kingdom, is the world’s third largest mining corporation, with a market capitalization of more than US$90 billion.[1]  On January 18, 2013, Rio Tinto’s board of directors announced that Tom Albanese was stepping down as CEO by mutual agreement with the board effective immediately.  This “dismiss-ignation”, as it was dubbed by the financial press, followed the announcement of a US$14 billion asset write-down, which included a $3 billion write-down associated with recently acquired coal assets in Mozambique.

It must have all seemed a case of “what goes around comes around” for Tom Albanese.  Back in 2010 during the global final crisis, Australia’s then-Prime Minister, Kevin Rudd, incurred the ire of Australia’s largest mining companies when his government announced its intention to introduce a 40 per cent resource super profits tax.  The battle with the mining companies ended with Mr. Rudd’s removal from office and replacement as Prime Minister by Julia Gillard.  Shortly afterwards, Mr. Albanese held up Kevin Rudd’s political fall from grace as a lesson to policymakers around the world.  This lesson also seems to have had resonance in the corporate realm, given that only three years later Mr. Albanese himself would suffer a similar fate at the hands of his own board.

The J.P. Morgan and Rio Tinto stories both reflect the (often unobserved) flipside of CEO power, namely accountability.  According to J.P. Morgan’s board, Jamie Dimon bore “ultimate responsibility for the failures that led to losses” associated with the London trading scandal.  Tom Albanese, in departing from Rio Tinto, echoed these sentiments, stating “… I fully recognise that accountability for all aspects of the business rests with the CEO”.

In the past, far more attention was often given to shaping CEO behavior via carrots rather than sticks.  In the aftermath of the global financial crisis, it appears that this may now be changing.  One way boards can censure CEO conduct is by reducing or scrapping bonuses, as occurred with Jamie Dimon, Corporate law scholars have long criticized the fact that pay-for-performance schemes have tended to be very favorable to CEOs, with inappropriate or unduly low performance levels.  The doyen of compensation commentators, Graef Crystal, has alluded to this fact by noting that traditionally there has been far greater “upside than downside elasticity” in the structure of pay-for-performance schemes.  There are a number of possible explanations for this distortion, including the focus on incentives in performance-based pay, and the historical power of CEOs in the pay-setting environment.

Pay-for-performance was, however, never meant to be about incentives alone.  It is also about pay legitimacy, and ensuring that CEOs receive compensation that reflects their “just deserts”.  This means that in some cases, simply withholding performance-based incentives will not be enough.  If a corporation is underperforming year after year, as was the case at Rio Tinto as a result of continuous asset write-downs, then it may be appropriate, and far more effective, for the board to hold the CEO accountable through loss of position.  The move by the Rio Tinto board was bold, but was widely greeted with approval in the financial press.  In fact, it has been suggested that J.P. Morgan may have gone “soft” on Jamie Dimon.  One Australian commentator described Tom Albanese’s removal as a welcome corporate governance development in relation to the boards of Australia’s largest mining companies, such as Rio Tinto and BHP Billiton, which had previously, like J.P. Morgan’s slap on the wrist of Jamie Dimon, expressed their disproval by slashing managerial bonuses.  The events at Rio Tinto are a reminder that bonus reductions are sometimes followed by stronger medicine.

Of course, a fundamental corporate governance difference between the two companies was the fact that, as is typical at Australian publicly listed companies, Rio Tinto split the role of CEO and Chairman, whereas Jamie Dimon occupied both positions at J.P. Morgan.  It is, therefore, perhaps unsurprising that the revolt at J.P. Morgan emanated from its Compensation Committee.  On the other hand, Rio Tinto’s Chairman, Jan du Plessis was pivotal in Mr. Albanese’s downfall.  Originally hailing from South Africa, Mr. du Plessis was appointed as non-executive Chairman at Rio Tinto in 2009, a position he held prior to this at British American Tobacco.  It has been said that few chairmen, confronting a crisis of confidence in management akin to that at Rio Tinto, would have acted as decisively in removing, and immediately replacing, the CEO from within the company’s ranks.[2]  Mr. du Plessis himself acknowledged that Rio Tinto was fortunate to have such a “rapid and seamless transition”.

In announcing Mr. Albanese’s departure, Rio Tinto noted that he would not be entitled to any lump sum payment, short-term performance bonus for 2012 or 2013, or long term share award for 2013.[3]  Although the punishment meted out by the Rio Tinto board was both swift and severe, ultimately Tom Albanese’s fall may have been softened by the fact that he received over A$30 million for his five year tenure as CEO, putting him in a significantly better financial position than Mr. Rudd, when he was deposed as Prime Minister in 2010.

An interesting postscript to this tale of two CEOs is the question of the accountability of boards themselves.  At J.P. Morgan, for example, the board’s risk committee failed to pick up the risky London trades.  The committee had only three members, which was far smaller than many of its rivals, and included two executives with little experience in the banking industry.  One modest structural change made in response to the revelation of the London losses was the appointment of Timothy Flynn, an existing director and former KPMG International Chairman, to the risk committee in August 2012.  J.P. Morgan’s board of directors as a whole has also come in for criticism for alleged lack of financial skills.  Despite calls for new faces to the board, the company has so far resisted replacing a single board member.