Tag: clawbacks

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31 Days to More Effective Compliance Programs

31 Days to a More Effective Compliance Program: Day 5 – Kenneth Polite on Clawbacks

Assistant Attorney General Kenneth A. Polite, Jr. began his speech on clawback policy developed by the DOJ to promote “innovative approaches to compensation,” which would “shift the burden of corporate malfeasance away from uninvolved shareholders onto those more directly responsible.” She believes “Companies should ensure that executives and employees are personally invested in promoting compliance,” as “nothing grabs attention or demands personal investment like having skin in the game, through direct and tangible financial incentives.” This led the Criminal Division to “develop guidance, guidance on how to reward corporations with compliance-promoting compensation programs.”

The clawback initiative has two parts. “First, every corporate resolution involving the Criminal Division will now include a requirement that the resolving company develop compliance-promoting criteria within its compensation and bonus system. Second is the creation of a 3-year pilot program under which the “Criminal Division will provide fine reductions to companies who seek to claw back compensation from corporate wrongdoers.”

Three key takeaways:

1. The clawback policy was developed to promote “innovative approaches to compensation.

2. Clawbacks will include those who had supervisory authority over the employees or business area engaged in the misconduct and knew of, or were willfully blind to, the misconduct.

3. How far will the DOJ push companies to move for clawbacks, and how far down the chain will it go?

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Blog

Key Compliance Speeches from 2023-Kenneth Polite on Incentives and Consequence Management

Assistant Attorney General Kenneth A. Polite, Jr. began his speech with an interesting aside. It is about the clear tie between poverty and corruption. This is why it is important to prosecute corrupt government officials because their actions keep the people of in such dire economic straits. He stated, “Just as crime recognizes no borders, our efforts to combat it must be equally boundless. We need our partners – both domestic and international – to solve community problems. That is where the Criminal Division thrives.” In the Diaz case there was international cooperation at various levels. Think about that for a moment, the US and Venezuelan governments cooperating on anything, yet they apparently did cooperate on this matter. Polite added that several recent FCPA corporate enforcement matters, “Glencore, ABB, Danske, and Stericycle, among many others, underscore the successes that we’ve shared with our colleagues abroad.”

To be truly effective community problem-solvers, prosecutors must broaden our sense of community by literally ‘spanning the globe’ to fight crime, including bribery and corruption. Polite stated, “Crime does not limit itself by country or region. Corruption’s corrosive effects are global, with the world’s poor often bearing the brunt. Bribery threatens our collective security by undermining the rule of law and providing a breeding ground for other crime and authoritarian rule.”

Clawbacks

The clawback policy was developed to promote “innovative approaches to compensation” which would “shift the burden of corporate malfeasance away from uninvolved shareholders onto those more directly responsible.” She believes “Companies should ensure that executives and employees are personally invested in promoting compliance” as “nothing grabs attention or demands personal investment like having skin in the game, through direct and tangible financial incentives.” This led the Criminal Division to “develop guidance, guidance on how to reward corporations with compliance-promoting compensation programs.”

The clawback Initiative has two parts. “First, every corporate resolution involving the Criminal Division will now include a requirement that the resolving company develop compliance-promoting criteria within its compensation and bonus system. Second is the creation of a 3-year pilot program under which the “Criminal Division will provide fine reductions to companies who seek to claw back compensation from corporate wrongdoers.”

Finally, the DOJ has added some real benefits for companies which follow these prescripts. First is that any company which resolves a FCPA violation will “pay the applicable fine, minus a reserved credit equaling the amount of compensation the company is attempting to claw back from culpable executives and employees.” Additionally, “If the company succeeds and recoups compensation from a responsible employee, the company gets to keep that clawback money — and also doesn’t have to pay the amount it recovered.” Finally, if the company’s efforts at clawbacks are not successful or completed during the pendency of the investigation up to the settlement “the pilot program will also ensure that those who pursue clawbacks in good faith but are unsuccessful are still eligible to receive a fine reduction.” All of these efforts are designed to “shift the burden of corporate wrongdoing away from shareholders, who frequently play no role in the misconduct, onto those directly responsible.” This new emphasis is clearly designed to encourage companies who do not already factor compliance into compensation to retool their programs and get ahead of the curve.

Polite provided more detail on the new clawback initiative. He said, “As to clawbacks: for companies that fully cooperate with our investigation and timely and appropriately remediate the misconduct, they may receive an additional fine reduction if the company has implemented a program to recoup compensation and uses that program. We expect companies that use these programs to address not only employees who engaged in wrongdoing in connection with the conduct under investigation, but also those who had supervisory authority over the employees or business area engaged in the misconduct, and knew of, or were willfully blind to, the misconduct.” (emphasis mine)

Expanding on the benefits for an organization, he stated, “If the company meets these factors and – in good faith – has initiated the process to recover such compensation at the time of resolution, our prosecutors will accord an additional fine reduction equal to the amount of any compensation that is recouped within the resolution term.” Finally, “if a company’s good faith effort is unsuccessful by the time the resolution term ends, our prosecutors will have discretion to accord a fine reduction of up to 25% of the amount of compensation that has been sought.”

Polite did leave room for companies to weigh a variety of factors in bringing a clawback claim. He noted, “We are not trying to incentivize waste. To the contrary, companies should make an assessment about the potential cost to shareholders and prospect of success of clawback litigation, given any applicable laws, and weigh it against the value of recoupment – and proceed in accordance with their stated corporate policies on executive compensation. This Pilot Program will be in effect for three years, allowing us to gather data and assess its effectiveness and also aid other components and offices in considering this important issue.”

Any litigation is always fraught with unknowns, both known and unknown. Given the imbroglio involving the DOJ and Cognizant Technologies Solutions over the DOJ prosecution of former executives, the road to any successful clawback will be fraught with peril. Additionally, it is not clear how far companies or the DOJ will push for clawbacks from “those who had supervisory authority over the employees or business area engaged in the misconduct.” If scope creep comes in it could be a wide group.

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Daily Compliance News

Daily Compliance News: December 14, 2023 – The Serious Misconduct Edition

Welcome to the Daily Compliance News. Each day, Tom Fox, the Voice of Compliance, brings you compliance-related stories to start your day. Sit back, enjoy a cup of morning coffee, and listen in to the Daily Compliance News. all from the Compliance Podcast Network. Each day we consider four stories from the business world: compliance, ethics, risk management, leadership, or general interest for the compliance professional.

Stories we are following in today’s edition:

  • Former BP CEO docked $40M for ‘serious misconduct’. (WSJ)
  • Why culture outside the US matters. (FT)
  • Tesla has a 2MM car recall. (BBC)
  • Hackers target outdated servers. (Reuters)
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Blog

Executive Compliance Comp and Compliance: From Incentives to Clawbacks

There are two problems that every company must deal with at the intersection of executive compensation and compliance. The first is the presence of perverse incentives within organizations, where executives are often encouraged to take excessive risks because they personally profit from them. This misalignment of incentives can lead to unethical behavior and non-compliance, ultimately harming the organization and its stakeholders. The second is both the Securities and Exchange Commission (SEC) and Department of Justice (DOJ) mandates for executive clawbacks.

Incentives

To address this issue, companies need to tie positive incentives directly to senior executives. By holding them accountable for compliance failures, we can align their compensation with compliance objectives. This approach ensures that executives have a personal stake in maintaining ethical practices within the organization. What makes this approach unique is that it is a business response to a legal problem, rather than a government mandate. A business response is always a better way to go, as it allows organizations to take ownership of their compliance programs and tailor them to their specific needs.

Various proposals are discussed in the podcast to ensure senior executives are held personally accountable for compliance failures. One solution, suggested by William Dudley, former president of the Federal Reserve Bank of New York, is for senior management and material risk takers to forfeit their performance bond in the case of large fines. This not only disciplines individual behavior and decision-making but also incentivizes individuals to flag issues when problems arise.

Another approach, outlined in an article titled “Ties That Bind Codes of Conduct,” recommends automatic reduction of pay for officers, directors, and advisors for failures of corporate governance. Executives would agree to pay back a portion of their gross compensation for a set period before the beginning of any improprieties, regardless of their knowledge of misdeeds within the company.

While corporate leaders may not be enthusiastic about being held accountable, these proposals offer a business solution to a legal problem. Holding senior executives responsible for the conduct of others aligns with their obligations under Sarbanes-Oxley and ensures that they are not shielded from the consequences of non-compliance. Shareholders are also becoming less accepting of the argument that leaders should not be responsible for the actions of their employees.

Data from an article by Gretchen Morgenson titled “Ways to Put Your Boss’s Skin in the Game” further supports the need for accountability in executive compensation. The article explores how to make senior executives more responsible for corporate malfeasance, with implications that apply to compliance programs and compensation tied to compliance.  Creating accountability in executive compensation is a critical step towards promoting ethical business practices and compliance within organizations. By tying positive incentives to senior executives, we can ensure that they have a personal stake in maintaining compliance objectives. The proposals discussed in the podcast, such as forfeiting performance bonds and enforcing pay reductions for failures of corporate governance, offer practical solutions to address perverse incentives and drive ethical behavior.

Clawbacks

Clawbacks, often seen as a form of guarantee for businesses, play a vital role in addressing employee misconduct. These provisions, typically included in written contracts, serve as a deterrent and allow organizations to reclaim incentive or bonus funds from employees engaged in wrongful activities. It is important to note that clawbacks apply to compensation received as incentives or bonuses, rather than salary.

The SEC has provided guidance on constructing effective clawback provisions. In their final rule titled “Listing Standards for Recovery of Erroneously Awarded Compensation,” (the Rule) the SEC directs National Securities Exchanges and Associations to establish listing standards for issuers to develop and implement policies for recovering incentive-based compensation in the event of required accounting restatements.

The DOJ has also weighed in on subject of clawbacks, most recently in the 2023 Evaluation of Corporate Compliance Programs (ECCP), it stated “Are the terms of bonus and deferred compensation subject to cancellation or recoupment, to the extent available under applicable law, in the event that non-compliant or unethical behavior is exposed before or after the award was issued? Does the company have a policy for recouping compensation that has been paid, where there has been misconduct? Have there been specific examples of actions taken (e.g., promotions or awards denied, compensation recouped or deferred compensation cancelled) as a result of compliance and ethics considerations?”

In summary, both the SEC and DOJ have now laid out the foundations for both incentives and consequence management.

SEC: The SEC Rule encompasses a wide range of scenarios. Companies are required to claw back incentive compensation erroneously received by current or former executives during the three-year period preceding the required restatement date. The definition of “received” is broad, considering incentive compensation earned even if not yet paid. The recoverable amount may differ from what executives would have received based on the required restatement. The SEC rule prohibits companies from obtaining indemnity insurance to protect executives from clawbacks. This step ensures that executives are held personally accountable for their actions and fosters a culture of compliance within organizations.

DOJ: In the ECCP has emphasized the significance of clawbacks in compliance programs. The ECCP directs companies to develop and apply compensation and clawback policies, shifting the burden of financial penalties away from innocent shareholders. The clear intent to prevent companies from shielding employees involved in illegal and unethical conduct. The DOJ will consider whether a company has incentivized compliance by designing compensation systems that defer or escrow certain compensation tied to conduct consistent with company values and policies. Enforcement of a contract provisions that permit the company to recoup previously awarded compensation if the recipient of such compensation is found to have engaged in or to be otherwise responsible for corporate wrongdoing is now a critical metric that prosecutors will consider. Finally, prosecutors may consider whether provisions for recoupment or reduction of compensation due to compliance violations or misconduct are maintained and enforced in accordance with company policy and applicable laws.

 Practical Steps

To create a robust compliance program that promotes ethical behavior and compliance, companies should consider the following practical advice:

  1. Documented Policies and Procedures: It is crucial for companies to document and reflect clawback policies and procedures in their compensation agreements. This documentation showcases a commitment to compliance and serves as a deterrent for potential misconduct.
  1. Clear Disciplinary Procedures: Companies should have appropriate and clear disciplinary procedures in place when enforcing a compliance program. Publicizing disciplinary actions internally and under local law can have a deterrent effect on employees, emphasizing the consequences of engaging in unlawful or unethical behavior.
  1. Personal Accountability: The DOJ and SEC prioritize holding individuals accountable for misconduct. Prosecutors evaluate whether a corporation’s compensation agreements incorporate clawback provisions that enable penalties to be levied against employees, executives, or directors involved in criminal conduct.

 Conclusion

Clawback provisions have become a crucial element in compliance programs, promoting ethical behavior and ensuring accountability within organizations. The SEC Rule, along with the DOJ’s emphasis on clawbacks from the Monaco Memo to the ECCP, highlights the significance of these provisions in the business world. By implementing well-documented clawback policies, companies can create a culture of compliance that rewards ethical behavior and protects innocent shareholders. Both initiatives prioritize ethical practices and compliance to build a better business environment for all stakeholders.

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31 Days to More Effective Compliance Programs

One Month to a More Effective Compliance Program: Day 9 – Clawbacks

In this podcast series, host Tom Fox explores the growing emphasis on clawback provisions in compliance programs and employee compensation.

Tom Fox delves into the crucial topic of clawback provisions in compliance programs and employee compensation. In light of the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) prioritizing individual accountability for misconduct, clawbacks have become essential in promoting ethical behavior and ensuring compliance. So, let’s dive in and explore the significance of clawbacks in today’s evolving compliance landscape.

Understanding Clawbacks and Incentive-Based Compensation:

Clawbacks, as discussed in the podcast, are provisions that enable organizations to reclaim incentive or bonus funds from employees engaged in misconduct. They serve as a powerful deterrent and hold individuals accountable for their actions. Previously, clawbacks were not seen as necessary, but the DOJ now mandates their inclusion in compensation agreements.

The DOJ’s Focus on Ethical Business Practices:

The DOJ, in its pursuit of punishing officers and employees who fail to conduct business ethically, has made clawbacks a part of best practices compliance programs. To evaluate a company’s compliance program, the DOJ and SEC consider whether the organization has appropriate disciplinary procedures in place. Publicizing disciplinary actions internally and under local law can have a deterrent effect, emphasizing the importance of transparent consequences for misconduct.

The Role of Clawbacks in Compliance Programs:

Having clawback provisions is now seen as a crucial aspect of a good corporate compliance culture. It promotes compliant behavior and demonstrates a company’s commitment to its compliance program. The DOJ investigates whether corporations have included clawback provisions in their compensation agreements and taken steps to execute on such agreements. This highlights the significance of documenting and reflecting these policies and procedures in a company’s own compensation practices.

The SEC’s Final Rule on Clawbacks:

The SEC’s final rule, titled “Listing Standards for Recovery of Erroneously Awarded Compensation,” directs issuers to establish policies for recovering incentive-based compensation in the event of required accounting restatements. This rule applies to both Big R and Little R restatements and provides guidance in the anti-corruption world. Companies are now required to claw back incentive compensation erroneously received by current or former executives during the three-year period preceding the required restatement date.

Ensuring Compliance with Clawbacks:

It is essential for companies to construct well-documented clawback programs that align with the SEC’s guidance. The recoverable amount may differ from what executives would have received based on the required restatement, emphasizing the need for clarity and transparency in compensation agreements. Additionally, the SEC’s final rule prohibits companies from obtaining indemnity insurance to protect executives from clawbacks, further reinforcing the importance of accountability.

Conclusion:

As we’ve explored in this episode, clawbacks play a vital role in promoting ethical behavior and compliance within organizations. The DOJ’s emphasis on individual accountability and the SEC’s final rule on clawbacks demonstrate the evolving landscape of compliance. By implementing well-documented clawback provisions, companies can deter misconduct, hold individuals accountable, and showcase their commitment to ethical practices. Remember, incorporating clawbacks into your compliance program is not just a regulatory requirement but a practical step towards fostering a culture of integrity and responsibility.

 Three key takeaways:

1. The DOJ now mandates clawbacks in a compliance program.

2. The SEC has passed a clawback rule apart from the Monaco Memo.

3. Your clawback program should be well-documented.

For more information, check out The Compliance Handbook, 4th edition, available on LexisNexis.com.

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Daily Compliance News

Daily Compliance News: June 21, 2023 – The Paris 2024 Olympics

Welcome to the Daily Compliance News. Each day, Tom Fox, the Voice of Compliance brings to you compliance-related stories to start your day. Sit back, enjoy a cup of morning coffee, and listen in to the Daily Compliance News. All, from the Compliance Podcast Network. Each day we consider four stories from the business world, compliance, ethics, risk management, leadership, or general interest for the compliance professional.

  • Paris 2024 Olympic offices raided in corruption probe. (ESPN)
  • It always starts at the top. (WSJ)
  • Jurisdictional issues around clawbacks. (JDSupra)
  • Palm oil industry corruption allegations. (Mongabay)
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Everything Compliance

Episode 114, The Monaco, Polite & ECCP Edition

Welcome to the only roundtable podcast in compliance as we celebrate our second century of shows. Everything Compliance has been honored by W3 as the top talk show in podcasting. In this episode, we have the quartet of Tom Fox, Jonathan Marks, Matt Kelly and special guest Scott Garland from Affiliated Monitors, who discuss at the recent speeches by DAG Lisa Monaco and Kenneth Polite, announcing changes in the DOJ’s Evaluation of Corporate Compliance Programs. We conclude with our fan fav Shout Outs and Rants section.

  1. Matt Kelly looks at the changes around clawbacks. He shouts out to the PCAOB for reminding folks that cryptocurrency ‘reserve reports’ are not worth the paper they are printed on.
  2. Jonathan Marks considers what the two speeches and changes in the ECCP mean for corporate governance. He shouts out to US House of Representatives for overwhelmingly voting to investigate the origins of Covid-19.
  3. Tom Fox looks at the changes to incentives, both financial and non-financial in the 2023 ECCP. He rants about the Tennessee legislature attempt to ban Shakespeare, movies such as Tootie and Some Like It Hot, politicians such as George Santos; all in the guise of banning drag shows.
  1. Special Guest Scott Garland looks at the changes in the monitor selection process and what that means for the line attorney prosecuting a FCPA violation. He shouts out to the Department of Justice for their continued evolution in their thinking about compliance and compliance programs.

The members of the Everything Compliance are:

  • Jay Rosen– Jay is Vice President, Business Development Corporate Monitoring at Affiliated Monitors. Rosen can be reached at JRosen@affiliatedmonitors.com
  • Karen Woody – One of the top academic experts on the SEC. Woody can be reached at kwoody@wlu.edu
  • Matt Kelly – Founder and CEO of Radical Compliance. Kelly can be reached at mkelly@radicalcompliance.com
  • Jonathan Armstrong –is our UK colleague, who is an experienced data privacy/data protection lawyer with Cordery in London. Armstrong can be reached at armstrong@corderycompliance.com
  • Jonathan Marks is Partner, Firm Practice Leader – Global Forensic, Compliance & Integrity Services at Baker Tilly. Marks can be reached at marks@bakertilly.com

The host and producer, ranter (and sometime panelist) of Everything Compliance is Tom Fox the Voice of Compliance. He can be reached at tfox@tfoxlaw.com. Everything Compliance is a part of the Compliance Podcast Network.

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Blog

The Week That Was in Compliance – The ECCP: Part 2 – Consequence Management

In addition to the speeches presented at the ABA’s 38th Annual National Institute on White Collar Crime, by Deputy Attorney General Lisa Monaco (2023 Monaco Speech) and Assistant Attorney General Kenneth A. Polite (Polite Speech); there was the release of the 2023 U.S. Department of Justice Criminal Division Evaluation of Corporate Compliance Programs (ECCP). Today we review another new addition to the ECCP, that being ‘consequence management’. This certainly includes clawbacks but there is also other language which compliance professionals will need to incorporate into their compliance program beyond clawbacks.

The Department of Justice (DOJ) has been talking about clawbacks for some time now. However, the revised language of the ECCP puts more rigor around what the DOJ is now mandating. This section begins by noting that financial penalties as well as financial incentives can influence employee behavior and that prosecutors are now required to consider both aspects. It states:

“By way of example, prosecutors may consider whether a company has publicized disciplinary actions internally, where appropriate and possible, which can have valuable deterrent effects. Prosecutors may also consider whether a company is tracking data relating to disciplinary actions to measure effectiveness of the investigation and consequence management functions. This can include monitoring the number of compliance-related allegations that are substantiated, the average (and outlier) times to complete a compliance investigation, and the effectiveness and consistency of disciplinary measures across the levels, geographies, units or departments of an organization…Some companies have also enforced contract provisions that permit the company to recoup previously awarded compensation if the recipient of such compensation is found to have engaged in or to be otherwise responsible for corporate wrongdoing. Finally, prosecutors may consider whether provisions for recoupment or reduction of compensation due to compliance violations or misconduct are maintained and enforced in accordance with company policy and applicable laws…Compensation structures that clearly and effectively impose financial penalties for misconduct can deter risky behavior and foster a culture of compliance.”

Clawbacks

With the Pilot Program and other announcements in the Monaco and Polite speeches, the DOJ has made clear that companies need to seek to recover amounts paid out to executives which were illegally received as corporate compensation. This could include both salary, stock options or similar payments or discretionary bonuses. Regarding your corporate clawback protocol itself, the ECCP poses the following questions:

  • What percentage of executive compensation is structured to encourage enduring ethical business objectives?
  • Are the terms of bonus and deferred compensation subject to cancellation or recoupment, to the extent available under applicable law, in the event that non-compliant or unethical behavior is exposed before or after the award was issued?
  • Does the company have a policy for recouping compensation that has been paid, where there has been misconduct?
  • Have there been specific examples of actions taken (e.g., promotions or awards denied, compensation recouped or deferred compensation cancelled) as a result of compliance and ethics considerations?

All of this means every compliance program will need to analyze each of these components as set out. It will also require a review of executive contracts to determine if there are clawback provisions set out in each employment contract. If there are no such provisions, they will need to be inserted. Finally, what “specific examples of actions taken” does a company have to show to the DOJ should they come knocking?

Consequence Management

The DOJ also mandated that compliance programs take a deeper dive into their entire financial incentive program; both incentives and dis-incentives. While not previously discussed in speeches, these new requirements seem to flow from the general statements made by both Monaco and Polite over the past year. In this area, the ECCP mandates the following inquiries:

  • How has the company ensured effective consequence management of compliance violations in practice?
  • What insights can be taken from the management of a company’s hotline that provide indicia of its compliance culture or its management of hotline reports?
  • How do the substantiation rates compare for similar types of reported wrongdoing across the company (i.e. between two or more different states, countries, or departments) or compared to similarly situated companies, if known?
  • Has the company undertaken a root cause analysis into areas where certain conduct is comparatively over or under reported?
  • What is the average time for completion of investigations into hotline reports and how are investigations that are addressed inconsistently managed by the responsible department?
  • What percentage of the compensation awarded to executives who have been found to have engaged in wrongdoing has been subject to cancellation or recoupment for ethical violations?
  • Taking into account the relevant laws and local circumstances governing the relevant parts of a compensation scheme, how has the organization sought to enforce breaches of compliance or penalize ethical lapses?
  • How much compensation has in fact been impacted (either positively or negatively) on account of compliance-related activities?

Obviously, there is some overlap with the clawback language but there is quite a bit new in these questions. The DOJ ties hotline and speak up reports directly to a company’s culture of compliance. This is almost a direct tie back to the findings of Kyle Welch in his seminal work on a speak up culture. But the DOJ goes on to ask about substantiation rates, closure rates, consistent and fair application of discipline (and rewards when called for) and root cause analysis; which are not simply technical aspects of compliance programs but are concrete steps companies can implement to engender trust with employees that their concerns will be taken seriously and then acted upon when they are raised. Once again, as with clawbacks, these are levels of analysis that many compliance programs have not yet taken but are now required to do so.

Join us tomorrow when we consider messaging apps under the revised ECCP.

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Compliance Into the Weeds

Updated DOJ Mandate on Clawbacks

The award-winning, Compliance into the Weeds is the only weekly podcast that takes a deep dive into a compliance-related topic, literally going into the weeds to explore a subject. In this episode, Matt and I dive into the hot topic of clawbacks, focusing on Deputy Attorney General Lisa Monaco’s new pilot program and Kenneth Polite’s take on prosecutorial discretion for organizations. Our hosts explore the opportunities for corporate compliance and HR personnel for clawback solutions and the use of the Federation Corrupt Practices Act (FCPA). They also discuss the need for a thorough documentation of personnel involved with and/or accused of illegal conduct and the potential costs to shareholders. Bottom line: Tom Fox and Matt Kelly are here to take you on a deep dive into the complexities of clawbacks and help organizations get compliant and stay compliant.

Key Highlights:

Prosecutorial Discretion and Credit [00:05:24]

Implications of the Foreign Corrupt Practices Act on Corporate Compliance and HR [00:09:41]

The Mathematics of Corporate Policy Development and Management [00:13:59]

Corporate Compliance and the Foreign Corrupt Practices Act [00:17:47]

Balancing Compliance and Risk in Business Practices [00:21:49]

 Notable Quotes:

1.     “It is part of the department’s larger effort to hold individuals more accountable and to have companies be participants in that project and to have companies embrace the culture of compliance; how would you hold individuals accountable if you’re the company, you’d have that clawback clause over their head, and then you would now have more incentive to use it, which is not necessarily an easy thing.”

2.     “What we expect companies that use programs to address not only employees who engaged and wrongdoing a connection with conduct under investigation, but also those who had supervisory authority over the employees or business area engaged in in the misconduct and knew of or were willfully blind to the misconduct.”

3.     “You must have the clawback policies in place at the time of resolution, then get a reserve credit for those clawback compensation moneys that you must successively claw back within the term of the resolution.”

4.     “If you try to recoup the compensation and fail, you’ll still be eligible for up to 25 percent of whatever you were trying to recoup.”

 Resources

Matt in Radical Compliance

Tom in FCPA Compliance and Ethics Blog

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Blog

The Week That Was in Compliance – Clawbacks

We are in the midst of a multipart review of last week’s speeches from the Department of Justice (DOJ) at the recently concluded ABA’s 38th Annual National Institute on White Collar Crime, held in Miami. Compliance professionals, white collar defense lawyers and indeed corporate executives will be talking about the past week in Miami for many moons to come. The speeches were made by Deputy Attorney General Lisa Monaco (2023 Monaco Speech) and Assistant Attorney General Kenneth A. Polite (Polite Speech) and they previewed a number of initiatives by the DOJ which every compliance professional will need to study in some detail. These new initiatives included:

The Criminal Division’s Pilot Program Regarding Compensation Incentives and Clawbacks

Evaluation of Corporate Compliance Programs (ECCP)

Revised Memorandum on Selection of Monitors in Criminal Division Matters

Over this series, I will be taking a deep dive into these speeches and new Evaluation of Corporate Compliance Program, Monitor Selection and Pilot Program on Incentives and Clawbacks. Today we take a deep dive into those portions of the Monaco and Polite Speeches which dealt with clawbacks or in the terminology of the ECCP-consequence management.

Monaco Speech

DAG Monaco discussed the development of the clawback policy to promote “innovative approaches to compensation” which would “shift the burden of corporate malfeasance away from uninvolved shareholders onto those more directly responsible.” She believes “Companies should ensure that executives and employees are personally invested in promoting compliance” as “nothing grabs attention or demands personal investment like having skin in the game, through direct and tangible financial incentives.” This led the Criminal Division to “develop guidance, guidance on how to reward corporations with compliance-promoting compensation programs.”

The clawback initiative has two parts. Monaco said, “First, every corporate resolution involving the Criminal Division will now include a requirement that the resolving company develop compliance-promoting criteria within its compensation and bonus system. Second is the creation of a 3-year pilot program under which the “Criminal Division will provide fine reductions to companies who seek to claw back compensation from corporate wrongdoers.””

Finally, the DOJ has added some real benefits for companies which follow these prescripts. First is that any company which resolves a Foreign Corrupt Practices Act (FCPA) violation will “pay the applicable fine, minus a reserved credit equaling the amount of compensation the company is attempting to claw back from culpable executives and employees.” Additionally, “If the company succeeds and recoups compensation from a responsible employee, the company gets to keep that clawback money — and also doesn’t have to pay the amount it recovered.” Finally, if the company’s efforts at clawbacks are not successful or completed during the pendency of the investigation up to the settlement “the pilot program will also ensure that those who pursue clawbacks in good faith but are unsuccessful are still eligible to receive a fine reduction.” All of these efforts are designed to “shift the burden of corporate wrongdoing away from shareholders, who frequently play no role in the misconduct, onto those directly responsible.” Monaco concluded, “We intend this program to encourage companies who do not already factor compliance into compensation to retool their programs and get ahead of the curve.”

Polite Speech

 As expected, Polite provided more detail on the new clawback initiative. He said, “As to clawbacks: for companies that fully cooperate with our investigation and timely and appropriately remediate the misconduct, they may receive an additional fine reduction if the company has implemented a program to recoup compensation and uses that program. We expect companies that use these programs to address not only employees who engaged in wrongdoing in connection with the conduct under investigation, but also those who had supervisory authority over the employees or business area engaged in the misconduct, and knew of, or were willfully blind to, the misconduct.” (emphasis mine)

Expanding on the benefits for an organization, he stated, “If the company meets these factors and – in good faith – has initiated the process to recover such compensation at the time of resolution, our prosecutors will accord an additional fine reduction equal to the amount of any compensation that is recouped within the resolution term.” Finally, “if a company’s good faith effort is unsuccessful by the time the resolution term ends, our prosecutors will have discretion to accord a fine reduction of up to 25% of the amount of compensation that has been sought.”

Polite did leave room for companies to weigh a variety of factors in bringing a clawback claim. He noted, “We are not trying to incentivize waste. To the contrary, companies should make an assessment about the potential cost to shareholders and prospect of success of clawback litigation, given any applicable laws, and weigh it against the value of recoupment – and proceed in accordance with their stated corporate policies on executive compensation. This Pilot Program will be in effect for three years, allowing us to gather data and assess its effectiveness and also aid other components and offices in considering this important issue.”

As a recovering trial lawyer, I know that any litigation is always fraught with unknowns, both known and unknown. Given the imbroglio involving the DOJ and Cognizant Technologies Solutions over the DOJ prosecution of former executives, the road to any successful clawback will be fraught with peril. Additionally, it is not clear how far companies or the DOJ will push for clawbacks from “those who had supervisory authority over the employees or business area engaged in the misconduct.” If scope creep comes in it could be a wide group.

Join me tomorrow as I begin an exploration of the updated Evaluation of Corporate Compliance Programs.