Tag: clawbacks

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The Week That Was in Compliance – The Polite Speech: Part 1

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 (Updated March 2023)

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 continue with an initial review of the Polite Speech.

Polite began with a clear plea for the righteousness of being a prosecutor. Interestingly he began by describing what he saw at the ABA White Collar conference in San Francisco, “During a short afternoon walk between the hotel and the U.S. Attorney’s Office, we saw homelessness, and drug addiction, and food insecurity, and lack of hygiene, and violence.” He went on to add “Human suffering. We see it in every city where this conference gathers, be it the Tenderloin area of San Francisco, Liberty City here in Miami, or the Lower Ninth Ward in New Orleans. The same things could be found in nearly every town across this country. Across this globe. Right outside. Right around us. Right around you, if you decide to open your eyes and accept a broader definition of community.” From there he related being a DOJ prosecutor to a calling to help fix these problems but being “problem-solvers”.

He used these domestic urban ills to transition to what he called a ‘righteous’ prosecution of Claudia Patricia Diaz Guillen, the former National Treasurer of Venezuela and her husband. They were charged with accepting over $100 million “in bribes from a Venezuelan billionaire businessman for access to purchase bonds from the Venezuela National Treasury at a favorable exchange rate. All the while, millions of Venezuelans had to confront daily economic crisis, rampant inflation, and unimaginable poverty and hunger.” This is while “96% of Venezuelans lived in poverty.” He ended this section by noting the prosecution was “a virtuous case that spanned the globe to hold multiple corrupt actors accountable and remove corrupt leadership – this prosecution exemplifies what our prosecutors can do.”

Polite believes that there is a clear tie between poverty and corruption. (One reason the San Francisco remarks were so interesting.) This is why it is important to prosecute corrupt government officials such as Diaz because her actions keep the people of Venezuela 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 Foreign Corrupt Practices Act (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, we have to 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.”

He pointed to this level of international cooperation which “has also been critical to MLARS’s work on the Kleptocracy Asset Recovery Initiative, which has targeted and restrained more than $3.6 billion relating to foreign official corruption and associated money laundering affecting the U.S. financial system.” As the US financial systems plays the central role in the world’s financial community and international banking system, the US MLARS Bank Integrity Unit (BIU) has worked to bring to justice “actors around the world seek to exploit the U.S. financial system, in some instances working with global financial institutions that facilitate their crimes.” Hence why the US and not Danske Bank’s home country of Denmark brought the criminal charges against the Banks for its role in a years-long money laundering operation out of its Estonia branch.

To demonstrate this commitment for the DOJ Polite stated, “since 2010, the BIU – with just 12 attorneys – has imposed more than $13 billion in financial penalties in 10 corporate criminal resolutions with global financial institutions for sanctions violations.” But more commitment is on the way as Polite pointed to “our Deputy Attorney General’s announcement yesterday of additional resources for the BIU and her focus on the intersection of national security and corporate prosecution. I know our BIU prosecutors will build upon their outstanding track record while continuing to work shoulder to shoulder with our partners in the National Security Division to achieve our united mission.”

Finally, in a most welcomed development, Polite stated “there’s no better way to broaden community than to speak your partners’ language – literally.” He announced the Criminal Division’s Office of Prosecutorial Development, Assistance, and Training – or OPDAT – will re-issue the FCPA Resource Guide in Spanish later this month. Kudos to the DOJ for taking this step.

Join me tomorrow where I take a deep dive into clawbacks and other new components of a compliance program.

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The Week That Was in Compliance – The Monaco Speech

In the ‘60s there was a television show called That Was the Week That Was. As with many great US television shows, it started in the UK on the BBC. It ran on NBC and introduced an American audience to David Frost, from the original British cast. It brought weekly and topical satire to US television and some of the contributors were among the greatest comedians of their generation. They included Henry Morgan, Phyllis Newman, Pat Englund, Buck Henry, Bob Dishy, Doro Merande, Alan Alda, Sandy Baron, Tom Bosley, Jerry Damon, Stanley Grover, Burr Tillstrom’s Puppets and The Norman Paris Orchestra. I still remember the theme song as it was sung by Nancy Ames in addition to her participating in the show.

I thought of that TV show when I looked back at the two days of speeches from the Department of Justice (DOJ) at the recent ABA 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 for many moons to come. The speeches were made by Deputy Attorney General (DAG) Lisa Monaco (2023 Monaco Speech) and Assistant Attorney General Kenneth A. Polite, Jr. (Polite Speech) and they previewed a number of initiatives by the DOJ which every compliance professional needs 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 (Updated March 2023)

Revised Memorandum on Selection of Monitors in Criminal Division Matters

Over the next several blog posts, I will be taking a deep dive into these speeches and the new Evaluation of Corporate Compliance Program, Monitor Selection and Pilot Program on Incentives and Clawbacks. Today we begin with a review of the 2023 Monaco Speech.

Monaco began by referencing her October 2012 speech to the Fall White Collar Crime conference, noting she “directed some immediate policy changes to invigorate corporate criminal enforcement, and I did so based on a few fundamental principles: preventing misconduct before it happens; holding individual wrongdoers accountable; and deterring and punishing recidivism.”

Around that time Monaco announced the “Corporate Crime Advisory Group to recommend more advances, based on input, and this is important, input from outside as well as inside the department.” This led to the September 2022 announcement of the Monaco Doctrine as laid out in the Monaco Memo where the DOJ changed its focus to “promoting cultures of corporate compliance, while also ensuring consistency and predictability in the way the government treats corporate crime.” Her goal was to “empower companies to do the right thing, by investing in compliance, in culture and in good corporate citizenship — while at the same time empowering our prosecutors to hold accountable those who don’t follow the law.”

At the end of the day, perhaps the most significant pronouncement from Monaco was the following “in today’s complex and uncertain geopolitical – very uncertain quite frankly – geopolitical environment, corporate crime and national security are overlapping to a degree never seen before, and the department is retooling to meet that challenge.” This fits with the Biden Administration’s Strategy on Combatting Corruption, which elevated the fight against bribery and corruption through enforcement of laws such as the Foreign Corrupt Practices Act (FCPA) to a National Security Issue. Of course, the Biden DOJ has said several times in the past that “Sanctions are the new FCPA” and Monaco reiterated that in her speech last week.

Monaco set the tone for the week by identifying five general areas of DOJ focus. (1) Inspiring a Culture of Compliance; (2) Voluntary Self-Disclosure Programs; (3) Promoting Compliance through Compensation and Clawback Programs; (4) Resource Commitments to Corporate Criminal Enforcement; and (5 ) Individual Accountability.

  1. A Culture of Compliance

The Monaco Memo “emphasized the department’s commitment to finding the right incentives to promote and support a culture of corporate compliance.” Monaco hoped to do so by creating two new areas of focus in addition to those laid out in the FCPA Resource Guide,  the 2017 Evaluation of Corporate Compliance Program and its 2020 Update and Chief Compliance Officer (CCO) certification requirement. In the 2023 Monaco Speech, she stated, “I noted two new areas of particular focus: a cross-department approach to promoting voluntary self-disclosure and how compensation structures can foster responsible corporate behavior. We want companies to step up and own up when they discover misconduct and to use compensation systems to align their executives’ financial interests with the company’s interest in good corporate citizenship.”

What is interesting about these two components is that they previously existed but were made more important in the Monaco Memo. Clear rewards for self-disclosure have been a part of FCPA enforcement since 2016 with the initiation of the Pilot Program around self-disclosure. Financial incentives and penalties (carrots and sticks) have been a part of best practices compliance programs since at least 2004 and were included in the original 2012 FCPA Resource Guide. But now a company must engage in both actions to demonstrate a “culture of compliance” to obtain the presumption of a declination under the Corporate Enforcement Policy.

  1. Voluntary Self-Disclosure

Seemingly buried in the speech is perhaps the most significant statement about white collar criminal enforcement. Monaco said, “Now, with respect to voluntary self-disclosure, I am pleased to report that, for the first time, every U.S. Attorney’s Office now has, and every component I should say, that prosecutes corporate crime, now has in place an operative, predictable and transparent voluntary self-disclosure program. These policies share a common principle: absent aggravating factors, no department component will seek a guilty plea where a company has voluntarily self-disclosed, cooperated and remediated the misconduct.” She went on to add, “Let me be very very clear. I want every general counsel, every executive and board member to take this message to heart: where your company discovers criminal misconduct, the pathway to the best resolution will involve prompt voluntary self-disclosure to the Department of Justice.” Her example was an excellent one: the ABB FCPA enforcement action.

  1. Compensation and Clawbacks

Once again Monaco emphasized a part of every best practices compliance program over the past 20 years, financial incentives for doing business ethically and in compliance. However, in her 2023 Speech, she emphasized the disincentives or clawbacks. She stated, “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, under the pilot program, the Criminal Division will provide fine reductions to companies who seek to claw back compensation from corporate wrongdoers.”

Monaco said the goal is “to shift the burden of corporate wrongdoing away from shareholders, who frequently play no role in the misconduct, onto those directly responsible.” The DOJ will incentivize such behavior in the following manner. “At the outset of a criminal resolution, the resolving company 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. 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.  And because we heard from stakeholders about how challenging and how expensive the pursuit of clawbacks can be, 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.”

  1. Resource Commitments

This section of the speech deals with DOJ resource commitments but it is still significant. Here Monaco emphasized the intersection of corruption, money-laundering, sanctions and National Security. This continues the Biden Administration trend on this score. There are new and additional resources the DOJ is bringing to bear in all of these areas. This includes the international arena as well. But a huge part of this commitment is that companies are now seen in many ways as the front line of criminal enforcement through self-disclosure of illegal conduct. If the DOJ continues down this path, both the incentives for self-disclosure and cooperation as well as the pain the DOJ will bring for companies which do self-disclose will be significant.  Monaco closed her speech with the following, “Investing now in a robust compliance program is good for business, and it is good for our collective economic and national security.”

  1. Individual Accountability

As far back as 2015, in the Yates Memo, the DOJ has said they will emphasize individual accountability, through individual, as opposed to corporate, enforcement actions. In her speech, Monaco pointed to charges brought against two of the current most prominent alleged fraudsters, Sam Bankman-Fried and Carlos Watson and the convictions out of Theranos; Elizabeth Homes and Sunny Balwani. She also stated, “The Criminal Division’s Fraud Section, for example, secured more individual convictions at trial last year than in any of the previous five years.  So, our message is clear: the department will zealously pursue corporate crime in any industry, and we will hold wrongdoers accountable, no matter how prominent or powerful they are.” While this has yet not been seen in FCPA enforcement, perhaps it will be this year and beyond.

Join me tomorrow where I look at the Polite Speech.

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Daily Compliance News

March 3, 2023 – The Spread The Pain 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 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 of Daily Compliance News:

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FCPA Compliance Report

Tom Fox and Mike Volkov with the 2022 Year in Review for the FCPA, Part 2

Welcome to the award-winning FCPA Compliance Report, the longest-running podcast in compliance. In this special episode, I am joined by Mike Volkov, founder of the Volkov Law Group. We conclude with Part 2, looking back on the year 2022 in FCPA and Compliance. We consider the Monaco Memo, the key cases, and some of the important issues which arose in 2022 and how they might impact compliance in 2023.

In this episode, we consider the following:

·      Building trust and credibility in the investigative process

·      The ABB FCPA enforcement action

·      The Honeywell FCPA enforcement action

·      Why the heat is on compliance after the Monaco Memo

·      Corporate incentives and discipline, including clawbacks

·      The Glencore FCPA enforcement action and CCO Certification

Resources

Mike Volkov on LinkedIn

The Volkov Law Group

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Blog

Incentives in Compliance: Part 2 – Clawbacks

Just as the Department of Justice (DOJ) has long focused on financial incentives in a best practices compliance program, it has equally focused on punishing those officers and employees who fail to do business ethically and in compliance. The 2020 FCPA Resource Guide, 2nd edition, stated, “A compliance program should apply from the board room to the supply room—no one should be beyond its reach. DOJ and SEC will thus consider whether, when enforcing a compliance program, a company has appropriate and clear disciplinary procedures, whether those procedures are applied reliably and promptly, and whether they are commensurate with the violation. Many companies have found that publicizing disciplinary actions internally, where appropriate under local law, can have an important deterrent effect, demonstrating that unethical and unlawful actions have swift and sure consequences.”

The Monaco Memo drove this point home with the statement, “Corporations can best deter misconduct if they make clear that all individuals who engage in or contribute to criminal misconduct will be held personally accountable. In assessing a compliance program, prosecutors should consider whether the corporation’s compensation agreements, arrangements, and packages (the “compensation systems”) incorporate elements ­ such as compensation clawback provisions – that enable penalties to be levied against current or former employees, executives, or directors whose direct or supervisory actions or omissions contributed to criminal conduct. Since misconduct is often discovered after it has occurred, prosecutors should examine whether compensation systems are crafted in a way that allows for retroactive discipline, including through the use of clawback measures, partial escrowing of compensation, or equivalent arrangements.”

Prior to the Monaco Memo, clawbacks had not been generally seen as a necessary part of a compliance program. However now it is clearly mandated by the DOJ. Moreover, having such a penalty in place is also seen as a part of a good corporate culture which not only penalizes those who engage in unethical behavior in violation of a company’s policies and procedures but will “promote compliant behavior and emphasize the corporation’s commitment to its compliance programs and its culture.”

This will mandate the DOJ investigating whether a corporation has included clawback provisions in its compensation agreements and whether “following the corporation’s discovery of misconduct, a corporation has, to the extent possible, taken affirmative steps to execute on such agreements and clawback compensation previously paid to current or former executives whose actions or omissions resulted in, or contributed to, the criminal conduct at issue.”

The issue for many compliance professionals is where to look for guidance in how to construct such clawback provisions. Fortunately, the Securities and Exchange Commission (SEC) has provided guidance in another area that the compliance professional can look to for guidance. In a final rule, published in 2022 and entitled “Listing Standards for Recovery of Erroneously Awarded Compensation”, the SEC directed “the national securities exchanges and associations that list securities to establish listing standards that require each issuer to develop and implement a policy providing for the recovery, in the event of a required accounting restatement, of incentive-based compensation received by current or former executive officers where that compensation is based on the erroneously reported financial information.” While this final rule related to Both Big-R and little-r restatements, the final rule does provide guidance in the anti-corruption compliance area.

According to a client alert, entitled “SEC Issues Long-Awaited Rule on Clawback of Executive Compensation”,  by law firm Vinson & Elkins LLP, the final rule “requires companies to claw back incentive compensation erroneously received by current and former executives during the three-year period preceding the required restatement date.” An interesting caveat is that under this final rule, “the term “received” generally means that the applicable financial reporting measure connected to incentive compensation has been satisfied and such incentive compensation has been earned, even if such incentive compensation has not yet actually been paid.”

This means “an annual bonus award is deemed received in the fiscal year that the executive earns the award based on achievement of the underlying performance measure(s), even if the award is not actually paid until March of the following fiscal year.” Interestingly, the final rule “applies to incentive compensation received by executive officers on or after the effective date of the listing standards, incentive compensation granted prior to the effective date would still be subject to the Rule if it is not received prior to the effective date.” Finally, this means that the “recoverable amount (on a pre-tax basis) is the difference between the incentive-based compensation received by the executives and the amount that would have been received based on the required restatement.”

While the Monaco Memo directed, “to develop further guidance by the end of the year on how to reward corporations that develop and apply compensation clawback policies, including how to shift the burden of corporate financial penalties away from shareholders- who in many cases do not have a role in misconduct–onto those more directly responsible.” This clause is an effort by the DOJ to keep companies from shielding recalcitrant executives from the consequences of their own illegal and unethical conduct. Here compliance professionals can also draw assistance from the SEC final rule for guidance which bans companies from obtaining indemnity insurance to protect executives from clawbacks. The final rule stated, “The Commission proposed that listed issuers would be prohibited from indemnifying any executive officer or former executive officer against the loss of erroneously awarded compensation.” The reason is that if your clawback provision can be overcome by indemnification, it would “fundamentally undermine the purpose of the statute and effectively nullify the mandatory nature of the compensation recovery.”

Of course, all of this should be written down and reflected in the corporation’s compliance policies and procedures. The Monaco Memo stated, “a corporation’s policies and practices regarding compensation and determine whether they are followed in practice.” This is also consistent with the SEC final rule which said that a company should develop and implement a policy requiring recovery of erroneously awarded incentive-based compensation, stating, “in the event that the issuer is required to prepare an accounting restatement due to material noncompliance with any financial reporting requirement, the issuer will recover from any of its current or former executive officers who received incentive-based compensation during the preceding three-year period based on the erroneous data, any such compensation in excess of what would have been paid under the accounting restatement.”

But the Monaco Memo made clear it is not simply having a written policy and procedure in place. There must be corporate action, if warranted, under the clawback policy and procedure. The DOJ will evaluate a company’s actions, “following the corporation’s discovery of misconduct, a corporation has, to the extent possible, taken affirmative steps to execute on such agreements and clawback compensation previously paid to current or former executives whose actions or omissions resulted in, or contributed to, the criminal conduct at issue.”

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GalloCast

Gallocast – Episode 5

Welcome to the GalloCast. You have heard of the Manningcast in football. Now we have the GalloCast in compliance. The two top brothers in compliance, Nick and Gio Gallo, come together for a free-form exploration of compliance topics. It is a great insight on compliance brought to you by the co-CEOs of Ethico. Fun, witty, and insightful with a dash of the two brothers throughout. It’s like listening to the Brothers Gallo talk compliance at the dinner table. Hosted by Tom Fox, the Voice of Compliance.

Topics in this episode include:

  • FTX
  • Elizabeth Holmes was sentenced. End of an era in tech?
  • Compliance program incentives and clawbacks.
  • Assessing culture.
  • Monaco Memo

Resources

Nick Gallo on LinkedIn

Gio Gallo on LinkedIn

Ethico

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Compliance Into the Weeds

Thinking about 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, we consider the recent SEC requirement for companies to publicly report clawback provisions and their effects in conjunction with the DOJ requirements for clawbacks. Highlights include:

·       What are clawbacks?

·       What does the SEC rule require?

·       Are clawbacks the mirror of executive incentives?

·       How does the DOJ position, as laid out in the Monaco Memo, differ (if any) from the SEC requirements?

·       How far down the corporate chain must a clawback provision impact?

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Daily Compliance News

November 1, 2022 the Good Governance Edition

In today’s edition of Daily Compliance News:

  • Musk fires Twitter Board and makes himself sole director. (WSJ)
  • EU wants stronger anti-forced labor law. (WSJ)
  • Trump companies don’t want to monitor. (Reuters)
  • Companies under clawback pressures from SEC. (WSJ)
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Blog

Some Thoughts on Clawbacks

Clawbacks have become a new topic in Foreign Corrupt Practices Act (FCPA) enforcement and compliance with the announcement of the Monaco Doctrine and release of the Monaco Memo. Matt Kelly, writing in Radical Compliance, noted, “The Securities and Exchange Commission [SEC] enacted a rule today that will require public companies to adopt and disclose executive compensation clawback policies, echoing the Justice Department’s effort to make companies exercise clawbacks more often when their executives commit misconduct.” With these developments, I thought it would be a good time to look at clawbacks and what they might mean for a corporate compliance program.

Let’s start with the basics, as in what is a clawback? According PayCor.Com a clawback “is a provision within a business or employment contract that allows—under a prescribed set of circumstances—an organization to reclaim incentive or bonus funds previously paid to an employee. Clawback clauses provide a form of guarantee in situations where a business needs to respond to employee misconduct, poor job performance, low achievements or a general decline in revenue.” The two key requirements are that (1) it is a ‘provision’ i.e., a written clause in a written employment agreement and (2) it is for compensation received in the form of an incentive or bonus, i.e., not salary. This second provision will be a critical point for employees.

Sanjai Bhagat and Charles M. Elson, in a Harvard Business Review (HBR) article entitled “Why Executive Compensation Clawbacks Don’t Work”, said, “the executive pay “clawback,” an idea that had its debut during the discussion around the passage of the Sarbanes-Oxley Act [SOX] in 2002, has become an increasingly common provision in executive compensation packages. In theory, clawback policies enable companies to recover incentive pay granted to executives for achieving financial performance targets on the basis of decisions and actions that subsequently turn out to be ethically and legally questionable, and which impose significant monetary and reputational liabilities on the company.” Indeed, as reported in the Wall Street Journal(WSJ), there have 11 executives sued by or who have settled with the SEC, based upon SOX.

Michael Schrage, in a 2012 HBR piece entitled “Bonuses Are Good, But Clawbacks Make Them Better”, said of the actions which can lead to clawbacks, “The behaviors may not be criminal or even unethical but they undeniably lead to decisions where individuals maximize their own compensation at the expense of their organization in potentially destructive ways. This typically holds true for the highest-ranking and most dynamic slices of industry, whether financial services, professional sports, health care or high tech.” This articulation would seem to fit in both the Department of Justice (DOJ) and SEC recent pronouncements.

While the regulators have focused on the punitive aspects of clawbacks, Schrage also notes they are the mirror for incentive-based compensation. “The fundamental asymmetry, of course, is the presence of bonuses and an absence of clawbacks. That is, individuals and teams may receive impressively large and ostensibly “performance-based” bonuses if they hit their numbers.” If there is no response for those who lie, cheat and steal to get such compensation, he believes an organization “is guilty of bad behavioral economics and even worse management” and that clawbacks are “deterrents and insurance policies for organizations that fear that talented individuals may take inappropriate and unsustainable shortcuts to get the bonus. Clawbacks are an essential technique for balancing long-term business health against short-term bonus wealth.”

All of this means that you should not think of compensation incentives and clawbacks as separate tools in your compliance tool kit but as complimentary tools to help foster a best practices compliance program. Bhagat and Elson propose “incentive compensation of corporate executives should consist only of restricted equity”; that is, an executive cannot sell shares of stock or exercise the options for six to 12 months after their last day in office. They believe, “This would prevent executives from capturing the financial gains from questionable decisions or actions before the longer-term costs of those decisions or actions became apparent. And from the company’s perspective, it is clearly easier to simply withhold the stock or options than to attempt to recover cash paid out.”

It would also make things from the SEC reporting perspective a bit easier as well, because as Kelly noted, the “SEC is requiring companies to develop and implement a policy providing for the recovery of erroneously awarded incentive-based compensation” which must “be filed as an exhibit in the company’s annual report, and the report must include disclosures about “any actions an issuer has taken pursuant to such recovery policy.””

The bottom line is that while both the SEC and DOJ’s thinking on clawbacks has evolved, the business commentary has been talking about clawbacks as a part of a best practices compensation program for some time. Bhagat and Elson wrote, “It is critical to good governance that companies be able to recover compensation from senior executives that has not been fairly and fully earned.” Schrage went further, stating, “Healthy conversations around clawbacks are as important to risk-management and employee morale as well-designed incentive-based compensation programs and a generous bonus pool. I’d argue there’s no such thing as well-designed incentive compensation programs that don’t have a carefully calibrated clawback component. Emphasizing bonuses at the expense of clawbacks is bad for everyone.”

With these new statutory requirements from the SEC based upon Dodd Frank and the pronouncements laid out in the Monaco Memo, clawbacks represent one of those rare mechanisms which represents a convergence between legal and regulatory concerns and better business outcomes. The government wants assurances that executive compensation is not determined by FCPA violations, financial fraud or other nefarious conduct and business want processes that those who do business ethically and in compliance by creating value through best practices compliance rather than cheating and law-breaking are properly incentivized.

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Daily Compliance News

October 27, 2022 the Clawback Edition

In today’s edition of Daily Compliance News:

  • Nigeria loses reimbursement claim against Glencore. (FT)
  • 10 takeaways from the Crypto Story. (Bloomberg)
  • SEC adopts executive compensation clawback rules. (Reuters)
  • Glencore sued over bribery in Congo. (WSJ)