Clawbacks in Word, Not Deed

By  – NYT

WHAT good is a policy if it’s never enforced?

That’s a question investors are asking these days about an executive paystandard that companies rarely seem to use. We’re talking about so-called clawback provisions allowing a company to retrieve compensation paid to executives who were later found to have grievously mismanaged or misbehaved.

Clawback policies have been in investors’ sights since the mid-2000s, after the accounting scandals at Enron and WorldCom. Shareholders began agitating for programs to retrieve pay if a company restated its earnings or uncovered embezzlement, bribery or other malfeasance. These shareholder proposals paralleled a measure under the Sarbanes-Oxley law that enabled regulators to go after executive pay that was later shown to have been generated by bookkeeping improprieties.

But in the almost 10 years since clawback policies became a hot topic among investors, there is little indication that they have resulted in significant recoveries. High-profile cases occasionally emerge — Ina Drew, the former head of JPMorgan Chase’s chief investment office, returned some pay after the disastrous losses she oversaw in the London whale matter. But examples like these are few and far between.

So some investors are taking up the issue again. Among them are officials overseeing the LongView Large Cap 500 index fund. LongView, which is run by the union-owned Amalgamated Bank, was among the first shareholders to push for clawback policies. In 2004, it submitted a proposal at Computer Associates when that company was embroiled in an accounting mess.

This year, LongView has joined other investors to push for more stringent policies among health care companies. The investors chose this industry after a series of federal investigations turned up evidence of illegal drug marketing; the companies involved in those matters wound up paying large settlements. Still, there were no indications that individual executives were made to return pay as a result.

“As investors we have to rely on the board to represent our interests and take action,” said Scott Zdrazil, director of corporate governance at Amalgamated Bank. “We want to make sure that compensation committees can exercise their discretion where appropriate without having to rely on outside regulatory agencies to get involved.”

The McKesson Corporation, a giant medical and health care concern, is one company that LongView has targeted. Last week, at its annual meeting in San Francisco, a majority of shares — 53 percent — voted in support of its proposal intended to toughen up its policy. The vote is not binding on the company, of course. In a statement on Friday, Kris Fortner, a McKesson spokesman, said: “We appreciate the support shown by our shareholders and the thoughtful way many have engaged with us as they carefully considered the proposals presented. This year’s proxy vote provided another opportunity for us to hear from shareholders and we are committed to responding to their feedback while remaining focused on delivering significant long-term value for our investors.”

Under McKesson’s current policy, the board can go after senior executives’ pay under three circumstances. First, it can move to claw back money if an employee engages in “intentional misconduct pertaining to a financial reporting requirement” that causes the company’s earnings to be restated. The board can also act if an employee’s conduct generates “a material negative revision of a financial operating measure” at the company. Finally, action can be taken against an employee who “engages in fraud, theft, misappropriation, embezzlement or dishonesty to the material detriment of the company’s financial results.”

Too much wiggle room, LongView contends. So it urged the board to eliminate the adjectives “intentional” and “material” from the policy. That way, it would cover any misconduct. And by removing the concept of materiality from the policy, McKesson’s board would be less likely to ignore misconduct on the grounds that it was not pervasive or systemic.

The definition of materiality is subjective, of course. Back in 2006, for example, McKesson paid $960 million to resolve a class action. In its regulatory filings, the company said it did not believe the resolution of this and other securities litigation would have a “material adverse effect” on the company’s financial standing. Perhaps not, but applying such a high threshold to employee misconduct could overlook a significant case of fraud or misappropriation.


The LongView fund’s proposal also asked the board to disclose any discussions it has involving enforcement of the company’s clawback policy going forward. This would give investors a better understanding of how McKesson’s directors proceed in these matters. LongView conceded that cases might arise where privacy concerns outweighed the merits of a public disclosure.

“Clawbacks have become popular in the marketplace and investors like them,” Mr. Zdrazil said. “But we’re at the point where investors rarely hear when clawbacks are used. Investors want greater transparency around these tools.”

McKesson tried to keep the LongView proposal from coming to a vote at the annual meeting, arguing unsuccessfully to the Securities and Exchange Commission that it should not be allowed on the company’s proxy. Once it was included, the company encouraged its shareholders to reject it, saying that its current standard was appropriate, effective and balanced. McKesson also contended that LongView’s call for disclosure of director deliberations about a potential recoupment was unnecessary and inappropriate.

OTHER health care companies have taken a different approach, cooperating with investors like LongView that want tighter clawback provisions. Over the last year, LongView has worked with the UAW Retiree Medical Benefits Trust and about a dozen other shareholders to develop principles for effective pay recovery programs at six pharmaceutical companies. Each of them — Amgen, Bristol-Myers Squibb, Eli Lilly, Johnson & Johnson, Merck and Pfizer — adopted the more rigorous principles before a shareholder proposal came up for a vote. Among them is the promise to disclose publicly when compensation is recouped.

“We see repeated regulatory and legal settlements coming out of corporate treasuries but rarely have we seen any indication of clawbacks being applied,” Mr. Zdrazil said. “Often settlements come with no wrongdoing provisions and the only people left on the hook for the payments are the share owners themselves. To help mitigate those legal and regulatory risks going forward we are interested in clawback policies with sharper teeth and more transparency in reporting to investors.”

It has taken a decade to get companies to talk the talk about executive pay clawbacks. That was viewed by investors as progress. Now, the question is: How many years before these companies walk the walk?

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