The DOJ is advocating for increased consequences for individuals who engage in misconduct or fail to exercise proper oversight, via the implementation of compliance compensation programs that include financial penalties. Companies need to develop incentives and penalties in a balanced manner to maintain ethical performance, while ensuring the potential for accountability. A crucial aspect of enforcing these policies is the execution of robust clawback provisions as part of the executive’s contract and bonus terms. These clawbacks can act as a deterrent for misconduct, and their enforceability largely depends on the clarity of their language, among other things. In this episode of Corruption, Crime and Compliance, Michael Volkov explores compliance compensation systems and their role in corporate governance in detail.
You’ll hear Michael talk about:
- Clawback provisions are important rules that determine how executives’ contracts and bonus terms can be enforced. Companies have a responsibility to execute robust clawback provisions to ensure accountability and deter misconduct.
- Compliance programs are becoming increasingly vital to global companies as they grapple with complex legal and economic risks. These programs are crucial in reinforcing compliant behavior and promoting positive corporate citizenship.
- The DOJ has emphasized the importance of compensation systems and consequence management in corporate compliance programs. Not being proactive in reviewing these systems is considered a serious mistake that requires urgent attention and correction.
- DOJ’s focus has expanded towards consequence management, seeking to escalate penalties for those involved in misconduct. Companies are required to implement compliance compensation programs focusing primarily on clawbacks.
- Clawback policies, often limited to senior executives and specific conduct, need to be broadened in their scope and applicability. Notably, the Dodd-Frank Act mandates listed companies to have a written clawback policy for financial restatements resulting from accounting misconduct.
- Compliance rewards act as a significant incentive for ethical behavior and compliance. Executives and managers who fulfill specific compliance requirements may become eligible for performance-related rewards.
- Compliance compensation systems must be designed to hold individuals accountable for misconduct. Penalties, including retroactive discipline and financial penalties like clawbacks or deferred compensation systems, can be potent deterrents.
- A comprehensive compliance compensation system requires careful crafting to minimize litigation and defense possibilities. It involves identifying the executives and managers to be included in the penalty system and determining the corresponding percentage penalties.
- A company must balance its incentive structure, considering factors like large contingent payouts to executives and ethical performance requirements. Clarity in written policies and employment agreements fortify clawback provisions.
- Collaboration between business, finance, legal, and HR is pivotal in the design and implementation of effective compliance reward and penalty systems.
KEY QUOTES:
“The DOJ wants to add to their risk calculation, and that’s requiring companies to implement compliance compensation programs that include financial penalties against those actors who engage in misconduct, or supervisors that fail to rein in their underlings or conduct proper oversight to ensure compliance.” – Michael Volkov
“Companies have to isolate and weigh incentives and bonus structures to make sure that they can still target accountability penalties commensurate with the risk posed by the executive if he or she engages in misconduct.” – Michael Volkov
“The key determinant of clawback enforceability is whether the company has insisted on execution of robust clawback provisions as part of the executive’s contract and bonus terms.” – Michael Volkov
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