Hold executives PERSONALLY accountable for corporate crime
By Philip Mattera, director of the Corporate Research Project for the Dirt Diggers Digest
This is meant to alter the usual practice of having the
company – and theoretically the shareholders – assume all of those costs.
As described in recent speeches by Deputy Attorney
General Lisa Monaco and Assistant AG Kenneth Polite, DOJ would not go after the
executives directly. Instead, companies that adopt executive-pay clawback
policies would receive reductions in the penalties they have to pay.
Clawbacks are not a new idea, but their use has been
limited. DOJ is now adding them to a package of efforts to create incentives
for better corporate conduct. In this case, the company gets the carrot while
misbehaving executives get the (financial) stick.
There are limitations with this approach. For one, it assumes that misconduct happens when executives go rogue. In reality, the offenses often occur as part of company policy. It is unclear whether in those cases the board of directors could compel everyone in the C-suite to surrender chunks of their compensation.
Nonetheless, the DOJ program could help end the assumption of many unscrupulous corporate executives that they are shielded from personal liability.
As it turns out, this DOJ initiative comes just as we are
starting to learn more about the true magnitude of executive compensation. To
comply with new SEC rules, publicly traded companies are issuing proxy
statements with additional calculations reflecting the value of stock awards
based on changes in share prices over the course of the year.
These new calculations, dubbed compensation actually paid, show that some executives are effectively receiving even more lavish pay packages than we thought.
The Wall Street Journal notes the
example of Eli Lilly, which recently reported that the compensation of CEO
David Ricks last year under the new approach amounted to $64.1 million, well
above the $21.4 million reported using the traditional measure.
I found another example in the proxy of
AbbVie, also a pharmaceutical producer. The compensation actually paid to CEO
Richard Gonzalez was over $67 million (compared to $26 million under the old
calculation).
The compensation-actually-paid figure is not always far
in excess of the traditional total compensation amount. Among the limited
number of proxies that have been issued so far, the new amount is sometimes
lower than the old one.
Bloated compensation, whether measured by the new method or the old one, is most problematic when it occurs at companies with tainted track records. AbbVie is a case in point.
Last year its subsidiary
Allergan agreed to
pay over $2 billion to state attorneys general to settle litigation concerning
the improper marketing of opioid medications. In Violation
Tracker, AbbVie has cumulative penalties of nearly $6 billion.
There are many other examples of companies with long rap
sheets that go on paying their top executives far too much. One is tempted to
think that those individuals are in effect being rewarded for breaking the
rules when that fattens the bottom line.
It is unclear that the new DOJ clawback program will do
much to change this dynamic, but it may serve as a stepping stone to more
aggressive measures to rein in corporate misconduct.
