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{{Short description|Mandatory return of money or benefits}}
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{{Corporate finance}}
{{Corporate finance}}
The term '''clawback''' or '''claw back''' refers to any money or benefits that have been given out, but are required to be returned (clawed back) due to special circumstances or events, which may be ones mentioned in a contract.<ref>{{cite web|url=http://www.investopedia.com/terms/c/clawback.asp|title= Clawback | website=Investopedia}}</ref><ref>[https://www.merriam-webster.com/dictionary/claw%20back]</ref>
The term '''clawback''' or '''claw back''' refers to any money or benefits that have been given out, but are required to be returned (clawed back) due to special circumstances or events, such as the monies having been received as the result of a financial crime, or where there is a clawback provision in the [[executive compensation]] contract.<ref>{{cite web|url=http://www.investopedia.com/terms/c/clawback.asp|title= Clawback | website=Investopedia}}</ref><ref>[https://www.merriam-webster.com/dictionary/claw%20back Claw Back | Definition of Claw Back by Merriam-Webster<!-- Bot generated title -->]</ref>

In law, clawback is most commonly known as [[restitution]].

==From government grantees==
In the past, clawback phenomena have been used primarily in securing [[tax incentive]]s, [[Tax holiday|abatements]], [[tax refund]]s, and [[Grant (money)|grants]]. Clawbacks are distinguished from repayments or refunds as they involve a [[Sanctions (law)|penalty]], in addition to a repayment.

The use of tax incentives for attracting jobs and [[capital investment]] has grown over the past decades to include performance measures from which to gauge a company's growth. Typical measures are:

#number of created jobs over 5
#annual payroll;
#amount of capital investment
#amount of depreciated value .

More unusual measures are retaining a headquarters at a specific site for a period of time, amount of production increase or production cost decrease per unit, or the requirement to bring a given technology to a commercial market. The recipient will be required to return the monetary value of the incentive plus a penalty and/or interest to the grantor of the incentive, usually a local or state taxing authority. As the use of incentives mature over time, it is sometimes alleged {{who|date=May 2020}} that the triggering of clawbacks for non-performance will likely become more ubiquitous.

Clawbacks can be understood to be the contractual elements that stand between the drive for economic development and community development and the slippery slope of [[corporate welfare]]. They are highly controversial and are utilized as community-based guarantees for some expectation of performance. The site location industry normally tries to eliminate or reduce any such promises as part of their negotiations.<ref>{{cite web|website=Business Facilities|url=http://www.businessfacilities.com/bf_03_04_cover5.asp|title=Cover|access-date=2006-09-13|archive-url=https://web.archive.org/web/20061113130202/http://www.businessfacilities.com/bf_03_04_cover5.asp|archive-date=2006-11-13|url-status=dead}}</ref><ref name="goodjobsfirst.org">{{cite web|website=Good Jobs First|url=http://www.goodjobsfirst.org/accountable_development/reform2.cfm|title=Reform|access-date=2006-09-13|archive-url=https://web.archive.org/web/20060823152332/http://www.goodjobsfirst.org/accountable_development/reform2.cfm|archive-date=2006-08-23}}</ref><ref>{{cite web|url=https://www.iedconline.org/ |website=International Economic Development Council|title=Home page}}</ref>


==From employees==
A '''clawback provision''' is a contractual clause typically included in employment contracts by [[financial firm]]s, by which money already paid to an employee must be paid back to the employer under certain conditions. The term also is in use in [[bankruptcy]] matters where insiders may have raided assets prior to a filing,<ref>{{cite web|url=http://www.abajournal.com/news/article/clawback_suit_seeks_420k_from_us_transportation_secretary|title=Clawback suit seeks $420K from US transportation secretary concerning in-house counsel pay|last=|first=|date=|website=American Bar Association|access-date=}}</ref> and in [[Medicaid#Clawback controversy|Medicaid]], when a state recovers costs of long-term care or covered medical expenses from the estates of deceased Medicaid patients. The aim of the clause is to secure an option for an employer or trustee to limit bonuses, compensation or other remuneration in case of catastrophic shifts in business, bankruptcy, and national crisis as the [[financial crisis of 2007–2008]], and for states to recoup the cost of administering Medicaid services.


===Clawback provision===
The employees' bonuses are, in a clawback scheme, tied specifically to the performance (or lack thereof) of the [[financial product]](s) the individual(s) may have created and/or sold as part of his or her job expecting a high profit. If the product does indeed do well over a long period of time, and permanently improves the nature of the firm, the bonuses paid to the individual are allowed to be retained by the individual. However, if the product fails, and damages the nature of the firm—even years down the line from the product's inception—then the firm has the inherent right to revoke, reclaim, or otherwise repossess some or all of the bonus amount(s).<ref name="newyorker.com">{{cite news|date=November 29, 2010|title=What Good Is Wall Street? Much of what investment bankers do is socially worthless|author=Cassidy, John |url=http://www.newyorker.com/reporting/2010/11/29/101129fa_fact_cassidy}}</ref> However, research shows managers who are subject to clawback provisions that are newly in place in a company often try to offset their increased risk of bonus clawback by demanding an increase in base salary that is not subject to being clawed back.<ref name="deHaan et al."/>
A ''clawback provision'' is a contractual clause typically included in employment contracts by [[financial firm]]s, by which money already paid to an employee must be paid back to the employer under certain conditions.


The employees' bonuses are, in a clawback scheme, tied specifically to the performance (or lack thereof) of the [[financial product]](s) the individual(s) may have created and/or sold as part of his or her job expecting a high profit. If the product does indeed do well over a long period of time, and permanently improves the nature of the firm, the bonuses paid to the individual are allowed to be retained by the individual. However, if the product fails, and damages the nature of the firm—even years down the line from the product's inception—then the firm has the right to revoke, reclaim, or otherwise repossess some or all of the bonus amount(s).<ref name="newyorker.com">{{cite news|date=November 29, 2010|title=What Good Is Wall Street? Much of what investment bankers do is socially worthless|author=Cassidy, John |url=http://www.newyorker.com/reporting/2010/11/29/101129fa_fact_cassidy}}</ref> However, research shows managers who are subject to clawback provisions that are newly in place in a company often try to offset their increased risk of bonus clawback by demanding an increase in base salary that is not subject to being clawed back.<ref name="deHaan et al."/>
The prevalence of clawback provisions among Fortune 100 companies increased from lower than 3% prior to 2005 to 82% in 2010.<ref name="CSuite">{{cite web|url=http://www.c-suiteinsight.com/index.php/2011/02/focus-on-clawbacks/|title=Focus on Clawbacks|website=C-Suite Insight|date=2011|access-date=2012-05-16|archive-url=https://archive.is/20130118164533/http://www.c-suiteinsight.com/index.php/2011/02/focus-on-clawbacks/|archive-date=2013-01-18|dead-url=yes|df=}}</ref> The growing popularity of clawback provisions is likely, at least in part, due to the [[Sarbanes-Oxley Act]] of 2002, which requires the [[U.S. Securities and Exchange Commission]] (SEC) to pursue the repayment of incentive compensation from senior executives that are involved in a fraud. In practice, the Securities and Exchange commission has enforced its clawback powers in only a small number of cases.<ref name= "Fried and Shilon">{{cite journal|ssrn=1798185 |title=Excess-Pay Clawbacks|authors= Fried, Jesse & Shilon, Nitzan |date=2011|journal= Journal of Corporation Law|volume= 36}}</ref>


The prevalence of clawback provisions among [[Fortune 100]] companies increased from lower than 3% prior to 2005, to 82% in 2010.<ref name="CSuite">{{cite web|url=http://www.c-suiteinsight.com/index.php/2011/02/focus-on-clawbacks/|title=Focus on Clawbacks|website=C-Suite Insight|date=2011|access-date=2012-05-16|archive-url=https://archive.today/20130118164533/http://www.c-suiteinsight.com/index.php/2011/02/focus-on-clawbacks/|archive-date=2013-01-18|url-status=dead}}</ref> The growing popularity of clawback provisions is likely, at least in part, due to the [[Sarbanes–Oxley Act]] of 2002, which requires the [[U.S. Securities and Exchange Commission]] (SEC) to pursue the repayment of incentive compensation from senior executives who are involved in a fraud. In practice, the Securities and Exchange Commission has enforced its clawback powers in only a small number of cases.<ref name="Fried and Shilon">{{cite journal|ssrn=1798185 |title=Excess-Pay Clawbacks|author1= Fried, Jesse |author2= Shilon, Nitzan |date=2011|journal= Journal of Corporation Law|volume= 36}}</ref>
The [[Dodd-Frank Act]] of 2010 mandates the SEC to require that U.S. public companies include a clawback provision in their executive compensation contracts that is triggered by any accounting restatement, regardless of fault (whereas the clawback provisions per the [[Sarbanes-Oxley Act]] only applied to intentional fraud). As of mid 2015, this portion of the Dodd-Frank Act has yet to be implemented. <ref name=SEC>{{cite web|url=https://www.sec.gov/rules/proposed/2015/33-9861.pdf |title=Listing Standards for Recovery of Erroneously Awarded Compensation|accessdate=February 10, 2018|website=SEC.gov}}</ref>


The [[Dodd–Frank Act]] of 2010 mandates that the SEC require that U.S. public companies include a clawback provision in their executive compensation contracts that is triggered by any accounting restatement, regardless of fault (whereas the clawback provisions per the [[Sarbanes–Oxley Act]] only applied to intentional fraud). As of mid-2015, this portion of the Dodd–Frank Act had yet to be implemented.<ref name=SEC>{{cite web|url=https://www.sec.gov/rules/proposed/2015/33-9861.pdf |title=Listing Standards for Recovery of Erroneously Awarded Compensation|access-date=February 10, 2018|website=SEC.gov}}</ref>
==Implications==
The usual objective of a clawback provision is to deter managers from publishing incorrect accounting information. Academic research finds that voluntarily adopted clawback provisions appear to be effective at reducing both intentional and unintentional accounting errors.<ref name= "deHaan et al.">{{cite news|ssrn=2049442 |title=Does Voluntary Adoption of a Clawback Provision Improve Financial Reporting Quality?|authors= deHaan, Ed & Hodge, Frank & Shevlin, Terry J. |date=2012|work=Contemporary Accounting Research, forthcoming}}</ref> The same study also finds that investors have greater confidence in a firm's financial statements after clawback adoption, and that boards of directors place greater weight on accounting numbers in executive bonuses after a clawback is in place (i.e., [[pay for performance (human resources)|pay for performance]] sensitivity increases).


===Faithless servant clawback===
According to a December 2010 ''[[The New Yorker|New Yorker]]'' magazine article,<ref name="newyorker.com"/> the clawback phenomenon pursued by banks and other financial groups directly and/or indirectly responsible for the financial crisis has been used by the chief administrators of those institutions in order to make the case that they are presently taking tangible self-corrective action to both prevent another crisis (by supposedly dis-incentivizing the sorts of shady investment-product behavior displayed by their people in the recent past) and to appropriately punish any potential future activity of a similar or identical sort. However, the case is made in ''The New Yorker'' article (which cites several professional economists who agree with its perspective) that it is probably unlikely that either result will become the case, and ''The New Yorker'' article also alleges that the people making this argument may not even truly believe it, but are instead promoting it as a sort of [[public relations]] tactic until such time as the impact of the financial crisis fades and similar (perhaps near-identical) abuses of the financial system can slowly and quietly resume, with minimal or no detection by outside forces.<ref name="newyorker.com"/>
Under the [[faithless servant]] doctrine, an employee who commits a crime in his work or fails to follow the company code of conduct or code of ethics is subject to having all of his compensation clawed back by the employer. In ''[[Chip Skowron|Morgan Stanley v. Skowron]]'', 989 F. Supp. 2d 356 (S.D.N.Y. 2013), applying New York's faithless servant doctrine, the court held that a hedge fund's portfolio manager engaging in insider trading in violation of his company's code of conduct, which also required him to report his misconduct, must repay his employer the full $31 million his employer paid him as compensation during his period of faithlessness.<ref name="auto6">{{Cite book|url=https://books.google.com/books?id=3RaGDwAAQBAJ&dq=%22faithless+servant%22&pg=PA472|title=Employment Law: Private Ordering and Its Limitations|first1=Timothy P.|last1=Glynn|first2=Rachel S.|last2=Arnow-Richman|first3=Charles A.|last3=Sullivan|date= 2019|publisher=Wolters Kluwer Law & Business|isbn=9781543801064|via=Google Books}}</ref><ref name="auto4">{{cite web|url=https://www.ibtimes.co.uk/faithless-ex-morgan-stanley-fund-manager-ordered-repay-31m-former-employer-1429819|author=Jerin Matthew|title='Faithless' Ex-Morgan Stanley Fund Manager Ordered to Repay $31m to Former Employer|date=December 20, 2013|website=International Business Times UK}}</ref><ref>{{cite web|url=https://dealbook.nytimes.com/2013/12/23/the-huge-costs-of-being-a-faithless-servant/|title=The Huge Costs of Being a 'Faithless Servant'|first=Peter J.|last=Henning|date=December 23, 2013|website=New York Times DealBook}}</ref><ref>{{cite web|url=https://www.greenwichtime.com/news/article/Morgan-Stanley-seeks-10-2-million-from-convicted-4193127.php|title=Morgan Stanley seeks $10.2 million from convicted former trader|date=January 15, 2013|work=GreenwichTime}}</ref> The court called the insider trading the "ultimate abuse of a portfolio manager's position."<ref name="auto4"/> The judge also wrote: "In addition to exposing Morgan Stanley to government investigations and direct financial losses, Skowron's behavior damaged the firm's reputation, a valuable corporate asset."<ref name="auto4"/>


==Background==
===Implications===
The usual objective of a clawback provision is to deter managers from publishing incorrect accounting information. Academic research finds that voluntarily adopted clawback provisions appear to be effective at reducing both intentional and unintentional accounting errors.<ref name="deHaan et al.">{{cite news|ssrn=2049442 |title=Does Voluntary Adoption of a Clawback Provision Improve Financial Reporting Quality?|author1= deHaan, Ed |author2= Hodge, Frank |author3= Shevlin, Terry J. |date=2012|work=Contemporary Accounting Research, forthcoming}}</ref> The same study also finds that investors have greater confidence in a firm's financial statements after clawback adoption, and that boards of directors place greater weight on accounting numbers in executive bonuses after a clawback is in place (''i.e.'', [[pay for performance (human resources)|pay for performance]] sensitivity increases).
In the past, clawback phenomena have been used primarily in securing [[tax incentive]]s, [[Tax holiday|abatements]], [[tax refund|refund]]s and [[Grant (money)|grants]]. Clawbacks are distinguished from repayments or refunds as they involve a [[Sanctions (law)|penalty]] in addition to a repayment.


According to a December 2010 ''[[The New Yorker|New Yorker]]'' magazine article,<ref name="newyorker.com"/> the clawback phenomenon pursued by banks and other financial groups directly and/or indirectly responsible for the financial crisis has been used by the chief administrators of those institutions in order to make the case that they are taking tangible self-corrective action to both prevent another crisis (by supposedly dis-incentivizing the sorts of shady investment-product behavior displayed by their people in the past) and to appropriately punish any potential future activity of a similar sort. However, some professional economists have argued that it is unlikely that either result will become the case, and that employee clawbacks are better seen as a [[public relations]] tactic until the impact of the financial crisis fades and similar abuses of the financial system can resume, with minimal or no detection by outside forces.<ref name="newyorker.com"/>
The use of tax incentives for attracting jobs and [[capital investment]] has grown over the past twenty odd years to include performance measures from which to gauge a company's growth. Typical measures are:


=== Notable cases ===
#number of created jobs over 5 or 10 years
In the United States, clawbacks were rarely used until 2006.<ref name="Goldstein">{{Cite web|url=https://www.marketwatch.com/story/only-two-execs-have-had-more-money-clawed-back-than-wells-fargos-stumpf-and-tolstedt-2017-04-11|title=Only two execs have had more money clawed back than Wells Fargo's Stumpf and Tolstedt|last=Goldstein|first=Steve|website=MarketWatch|language=en-US|access-date=2020-03-15}}</ref> Major cases included a $600 million clawback affecting [[William W. McGuire]] of [[UnitedHealth Group]], $500 million affecting [[Dennis Kozlowski]] of [[Tyco International|Tyco]], and in 2019 clawbacks of compensation for the former CEO of Wells Fargo [[John Stumpf]] as well as a colleague.<ref name="Goldstein"/>
#annual payroll
#amount of capital investment over a similar time frame, and
#amount of depreciated value in a given time.


==From investors==
More unusual measures are retaining a headquarters at a specific site for a period of time, amount of production increase or production cost decrease per unit or the requirement to bring a given technology to a commercial market. The recipient will be required to return the monetary value of the incentive plus a penalty and/or interest to the grantor of the incentive, usually a local or state taxing authority. As the use of incentives mature over time, it is sometimes alleged {{who|date=May 2012}} that the triggering of clawbacks for non performance will likely become more ubiquitous.
Clawback lawsuits in US courts, especially from innocent individuals and entities who profited from financial crimes of others, have increased in the years since 2000.<ref name="autogenerated2">Sepinwall, A. (2012). [https://repository.upenn.edu/cgi/viewcontent.cgi?article=1000&context=lgst_papers "Righting Others' Wrongs: A Critical Look at Clawbacks in Madoff-Type Ponzi Schemes and Other Frauds,"] ''Brooklyn Law Review'', 78 (1), 1-64.</ref>


The [[recovery of funds from the Madoff investment scandal|yearslong clawback]] undertaken after the [[Madoff investment scandal]], which attempted to transfer money back from the financial winners to the financial losers among those who had invested in [[Bernie Madoff]]'s [[Ponzi scheme]], is notable both for the size and success of the operation. A team of lawyers headed by [[Irving Picard]] were able to recover over $13 billion, or about 75%, of the estimated $19 billion collectively lost by investors, and transfer it back to those investors who had claimed losses.<ref name="autogenerated2" /><ref>[https://www.wsj.com/articles/the-amazing-madoff-clawback-1543620951 "The Amazing Madoff Clawback; How two lawyers, Irving Picard and David Sheehan, have recovered 75 cents on the dollar of the stolen money—many times the usual rate in such cases,"] ''The Wall Street Journal'', November 30, 2018.</ref><ref name="autogenerateda">[https://www.bloomberg.com/graphics/2018-recovering-madoff-money/ "Madoff's Victims Are Close to Getting Their $19 Billion Back,"<!-- Bot generated title -->] Bloomberg.</ref> This was a far higher percentage than the usual recovery rate for investor clawbacks, which typically ranges from 5 to 30 percent.<ref name="autogenerateda" /> Of the recovered money, $7.2 billion came from the estate of just one investor, [[Jeffry Picower]]; it was the largest [[civil forfeiture]] payment in U.S. history.<ref name="autogenerateda" /><ref>[https://www.thedailybeast.com/dollar72-billion-picower-settlement-payday-for-madoff-victims "$7.2 Billion Picower Settlement: Payday for Madoff Victims,"<!-- Bot generated title -->] ''The Daily Beast''.</ref>
Clawbacks can be understood to be the contractual elements that stand between the drive for economic development and community development and the slippery slope of [[corporate welfare]]. They are highly controversial and are utilized as community based guarantees for some expectation of performance. The site location industry normally tries to eliminate or reduce any such promises as part of their negotiations.<ref>{{cite web|website=Business Facilities|url=http://www.businessfacilities.com/bf_03_04_cover5.asp|title=Cover|date=|access-date=2006-09-13|archive-url=https://web.archive.org/web/20061113130202/http://www.businessfacilities.com/bf_03_04_cover5.asp|archive-date=2006-11-13|dead-url=yes|df=}}</ref><ref name="goodjobsfirst.org">{{cite web|website=Good Jobs First|url=http://www.goodjobsfirst.org/accountable_development/reform2.cfm|title=Reform|access-date=2006-09-13|archive-url=https://web.archive.org/web/20060823152332/http://www.goodjobsfirst.org/accountable_development/reform2.cfm|archive-date=2006-08-23|dead-url=yes|df=}}</ref><ref name="goodjobsfirst.org"/><ref>{{cite web|url=https://www.iedconline.org/ |website=International Economic Development Council|title=Homem page}}</ref>


==Other clawback types==
==Use in mortgage brokering==
Clawback provisions are also used in [[bankruptcy]] matters where insiders may have raided assets prior to a filing,.<ref>{{cite web|url=http://www.abajournal.com/news/article/clawback_suit_seeks_420k_from_us_transportation_secretary|title=Clawback suit seeks $420K from US transportation secretary concerning in-house counsel pay|website=American Bar Association}}</ref> The aim of the clause is to secure an option for an employer or trustee to limit bonuses, compensation, or other remuneration in case of catastrophic shifts in business, bankruptcy, and national crisis such as the [[financial crisis of 2007–2008]].
Clawbacks are also used by most banks and lenders to recover money from "unprofitable" home loans. This is usually done when the borrower pays back the loan in a short period of time, usually within 24 months of the loan advancement.


==In various countries==
In Australia this fee is usually 0.77% of the total loan amount for loans paid back within the first 12 months after the settlement and 0.385% within 24 months. If a borrower is using a mortgage broker for their home loan, then the broker will usually charge them this amount.
[[Italy]] and the [[Netherlands]] have several clawback regimes, and there are two clawback regimes in the [[United Kingdom]].<ref name=autogenerated1>{{Cite web |url=https://communications.freshfields.com/files/uploads/documents/marcus%20s/Clawback.pdf |title=Clawback; A global guide |access-date=2019-07-21 |archive-date=2019-07-21 |archive-url=https://web.archive.org/web/20190721201711/https://communications.freshfields.com/files/uploads/documents/marcus%2520s/Clawback.pdf |url-status=dead }}</ref> The French clawback regime is limited.<ref name=autogenerated1 /> In [[Belgium]], their enforceability is unclear.<ref name=autogenerated1 />


==References==
==References==

Latest revision as of 19:49, 11 May 2024

The term clawback or claw back refers to any money or benefits that have been given out, but are required to be returned (clawed back) due to special circumstances or events, such as the monies having been received as the result of a financial crime, or where there is a clawback provision in the executive compensation contract.[1][2]

In law, clawback is most commonly known as restitution.

From government grantees

[edit]

In the past, clawback phenomena have been used primarily in securing tax incentives, abatements, tax refunds, and grants. Clawbacks are distinguished from repayments or refunds as they involve a penalty, in addition to a repayment.

The use of tax incentives for attracting jobs and capital investment has grown over the past decades to include performance measures from which to gauge a company's growth. Typical measures are:

  1. number of created jobs over 5
  2. annual payroll;
  3. amount of capital investment
  4. amount of depreciated value .

More unusual measures are retaining a headquarters at a specific site for a period of time, amount of production increase or production cost decrease per unit, or the requirement to bring a given technology to a commercial market. The recipient will be required to return the monetary value of the incentive plus a penalty and/or interest to the grantor of the incentive, usually a local or state taxing authority. As the use of incentives mature over time, it is sometimes alleged [who?] that the triggering of clawbacks for non-performance will likely become more ubiquitous.

Clawbacks can be understood to be the contractual elements that stand between the drive for economic development and community development and the slippery slope of corporate welfare. They are highly controversial and are utilized as community-based guarantees for some expectation of performance. The site location industry normally tries to eliminate or reduce any such promises as part of their negotiations.[3][4][5]

From employees

[edit]

Clawback provision

[edit]

A clawback provision is a contractual clause typically included in employment contracts by financial firms, by which money already paid to an employee must be paid back to the employer under certain conditions.

The employees' bonuses are, in a clawback scheme, tied specifically to the performance (or lack thereof) of the financial product(s) the individual(s) may have created and/or sold as part of his or her job expecting a high profit. If the product does indeed do well over a long period of time, and permanently improves the nature of the firm, the bonuses paid to the individual are allowed to be retained by the individual. However, if the product fails, and damages the nature of the firm—even years down the line from the product's inception—then the firm has the right to revoke, reclaim, or otherwise repossess some or all of the bonus amount(s).[6] However, research shows managers who are subject to clawback provisions that are newly in place in a company often try to offset their increased risk of bonus clawback by demanding an increase in base salary that is not subject to being clawed back.[7]

The prevalence of clawback provisions among Fortune 100 companies increased from lower than 3% prior to 2005, to 82% in 2010.[8] The growing popularity of clawback provisions is likely, at least in part, due to the Sarbanes–Oxley Act of 2002, which requires the U.S. Securities and Exchange Commission (SEC) to pursue the repayment of incentive compensation from senior executives who are involved in a fraud. In practice, the Securities and Exchange Commission has enforced its clawback powers in only a small number of cases.[9]

The Dodd–Frank Act of 2010 mandates that the SEC require that U.S. public companies include a clawback provision in their executive compensation contracts that is triggered by any accounting restatement, regardless of fault (whereas the clawback provisions per the Sarbanes–Oxley Act only applied to intentional fraud). As of mid-2015, this portion of the Dodd–Frank Act had yet to be implemented.[10]

Faithless servant clawback

[edit]

Under the faithless servant doctrine, an employee who commits a crime in his work or fails to follow the company code of conduct or code of ethics is subject to having all of his compensation clawed back by the employer. In Morgan Stanley v. Skowron, 989 F. Supp. 2d 356 (S.D.N.Y. 2013), applying New York's faithless servant doctrine, the court held that a hedge fund's portfolio manager engaging in insider trading in violation of his company's code of conduct, which also required him to report his misconduct, must repay his employer the full $31 million his employer paid him as compensation during his period of faithlessness.[11][12][13][14] The court called the insider trading the "ultimate abuse of a portfolio manager's position."[12] The judge also wrote: "In addition to exposing Morgan Stanley to government investigations and direct financial losses, Skowron's behavior damaged the firm's reputation, a valuable corporate asset."[12]

Implications

[edit]

The usual objective of a clawback provision is to deter managers from publishing incorrect accounting information. Academic research finds that voluntarily adopted clawback provisions appear to be effective at reducing both intentional and unintentional accounting errors.[7] The same study also finds that investors have greater confidence in a firm's financial statements after clawback adoption, and that boards of directors place greater weight on accounting numbers in executive bonuses after a clawback is in place (i.e., pay for performance sensitivity increases).

According to a December 2010 New Yorker magazine article,[6] the clawback phenomenon pursued by banks and other financial groups directly and/or indirectly responsible for the financial crisis has been used by the chief administrators of those institutions in order to make the case that they are taking tangible self-corrective action to both prevent another crisis (by supposedly dis-incentivizing the sorts of shady investment-product behavior displayed by their people in the past) and to appropriately punish any potential future activity of a similar sort. However, some professional economists have argued that it is unlikely that either result will become the case, and that employee clawbacks are better seen as a public relations tactic until the impact of the financial crisis fades and similar abuses of the financial system can resume, with minimal or no detection by outside forces.[6]

Notable cases

[edit]

In the United States, clawbacks were rarely used until 2006.[15] Major cases included a $600 million clawback affecting William W. McGuire of UnitedHealth Group, $500 million affecting Dennis Kozlowski of Tyco, and in 2019 clawbacks of compensation for the former CEO of Wells Fargo John Stumpf as well as a colleague.[15]

From investors

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Clawback lawsuits in US courts, especially from innocent individuals and entities who profited from financial crimes of others, have increased in the years since 2000.[16]

The yearslong clawback undertaken after the Madoff investment scandal, which attempted to transfer money back from the financial winners to the financial losers among those who had invested in Bernie Madoff's Ponzi scheme, is notable both for the size and success of the operation. A team of lawyers headed by Irving Picard were able to recover over $13 billion, or about 75%, of the estimated $19 billion collectively lost by investors, and transfer it back to those investors who had claimed losses.[16][17][18] This was a far higher percentage than the usual recovery rate for investor clawbacks, which typically ranges from 5 to 30 percent.[18] Of the recovered money, $7.2 billion came from the estate of just one investor, Jeffry Picower; it was the largest civil forfeiture payment in U.S. history.[18][19]

Other clawback types

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Clawback provisions are also used in bankruptcy matters where insiders may have raided assets prior to a filing,.[20] The aim of the clause is to secure an option for an employer or trustee to limit bonuses, compensation, or other remuneration in case of catastrophic shifts in business, bankruptcy, and national crisis such as the financial crisis of 2007–2008.

In various countries

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Italy and the Netherlands have several clawback regimes, and there are two clawback regimes in the United Kingdom.[21] The French clawback regime is limited.[21] In Belgium, their enforceability is unclear.[21]

References

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  1. ^ "Clawback". Investopedia.
  2. ^ Claw Back | Definition of Claw Back by Merriam-Webster
  3. ^ "Cover". Business Facilities. Archived from the original on 2006-11-13. Retrieved 2006-09-13.
  4. ^ "Reform". Good Jobs First. Archived from the original on 2006-08-23. Retrieved 2006-09-13.
  5. ^ "Home page". International Economic Development Council.
  6. ^ a b c Cassidy, John (November 29, 2010). "What Good Is Wall Street? Much of what investment bankers do is socially worthless".
  7. ^ a b deHaan, Ed; Hodge, Frank; Shevlin, Terry J. (2012). "Does Voluntary Adoption of a Clawback Provision Improve Financial Reporting Quality?". Contemporary Accounting Research, forthcoming. SSRN 2049442.
  8. ^ "Focus on Clawbacks". C-Suite Insight. 2011. Archived from the original on 2013-01-18. Retrieved 2012-05-16.
  9. ^ Fried, Jesse; Shilon, Nitzan (2011). "Excess-Pay Clawbacks". Journal of Corporation Law. 36. SSRN 1798185.
  10. ^ "Listing Standards for Recovery of Erroneously Awarded Compensation" (PDF). SEC.gov. Retrieved February 10, 2018.
  11. ^ Glynn, Timothy P.; Arnow-Richman, Rachel S.; Sullivan, Charles A. (2019). Employment Law: Private Ordering and Its Limitations. Wolters Kluwer Law & Business. ISBN 9781543801064 – via Google Books.
  12. ^ a b c Jerin Matthew (December 20, 2013). "'Faithless' Ex-Morgan Stanley Fund Manager Ordered to Repay $31m to Former Employer". International Business Times UK.
  13. ^ Henning, Peter J. (December 23, 2013). "The Huge Costs of Being a 'Faithless Servant'". New York Times DealBook.
  14. ^ "Morgan Stanley seeks $10.2 million from convicted former trader". GreenwichTime. January 15, 2013.
  15. ^ a b Goldstein, Steve. "Only two execs have had more money clawed back than Wells Fargo's Stumpf and Tolstedt". MarketWatch. Retrieved 2020-03-15.
  16. ^ a b Sepinwall, A. (2012). "Righting Others' Wrongs: A Critical Look at Clawbacks in Madoff-Type Ponzi Schemes and Other Frauds," Brooklyn Law Review, 78 (1), 1-64.
  17. ^ "The Amazing Madoff Clawback; How two lawyers, Irving Picard and David Sheehan, have recovered 75 cents on the dollar of the stolen money—many times the usual rate in such cases," The Wall Street Journal, November 30, 2018.
  18. ^ a b c "Madoff's Victims Are Close to Getting Their $19 Billion Back," Bloomberg.
  19. ^ "$7.2 Billion Picower Settlement: Payday for Madoff Victims," The Daily Beast.
  20. ^ "Clawback suit seeks $420K from US transportation secretary concerning in-house counsel pay". American Bar Association.
  21. ^ a b c "Clawback; A global guide" (PDF). Archived from the original (PDF) on 2019-07-21. Retrieved 2019-07-21.