😈 Visible Hands: Fitting the Punishment to the Crime
We examine corporate clawbacks and other monetary consequences for business misconduct.
Two long-standing scandals in American business -- Purdue Pharma’s role in the opioid epidemic and Goldman Sachs’ involvement in the 1MDB fraud -- found themselves being wrapped up, in a legal sense recently. We examine corporate clawbacks and other monetary consequences for business misconduct.
As a refresher, Malaysia's then-Prime Minister and Malaysian financier / celebrity brown noser Jho Low were accused of channelling over $4.5 billion from 1MDB, a government-run strategic development company, to personal bank accounts. (More details on what went down from Hasan Minhaj here.)
Goldman Sachs’ Asian subsidiary pled guilty surrounding allegations of corruption and bribery and the parent company, Goldman Sachs, admitted wrongdoing in a multi-billion dollar settlement. On top of the firm’s fines and criminal investigations of those closest to the wrongdoing, Goldman Sachs’ board will seek to take back compensation: $76 million from former executives charged or disciplined for their part in the 1MDB fraud and $174 million total, including from the bank’s top executives.
But is it enough? According to the WSJ, Goldman Sachs’ Tim Leissner (husband to Baby Phat founder, Kimora Lee Simmons) is on the hook to forfeit $43.7 million dollars, though he apparently received more than $200 million from 1MDB.
Meanwhile, Goldman Sachs, the WSJ also reported, will “escape without a government-appointed monitor to oversee its compliance department.” NYT reporter David Enrich pointed out that Goldman Sachs admitted fault in a “multibillion-dollar fraud that harmed an entire country.”
In Purdue Pharma’s case, the ruling has also drawn questions about the scope of punishment for individuals. Pleading guilty to charges related to OxyContin drug marketing, Purdue Pharma’s penalties could total more than $8 billion, according to the Justice Department.
As a privately held pharmaceutical company, its owners are the Sackler family. The family will be on the hook to pay $225 million. However, critics look at the family’s estimated wealth - $13 billion - and question if the ruling went far enough if much of the family’s money can be traced back to the sales of OxyContin.
In general, according to Compliance Week, it’s rare to see corporations retrieve money already paid to executives for accused bad behavior. Other examples include Wells Fargo “clawing back” millions from a former CEO and another executive in the wake of their fake accounts scandal and Tyco suing their former CEO for allegedly looting. PG&E recently instituted a policy of clawbacks if misconduct is discovered.
Clawing back compensation can also become expensive. Harvard Law School’s Forum on Corporate Governance wrote a paper in August about how McDonald’s Corporation’s action to pursue a clawback against their former CEO (fired for sexual harassment) was a “cautionary reminder...that a clawback situation can heighten a company’s litigation exposure, trigger embarrassing and potentially damaging publicity, and raise questions about the adequacy of the board’s governance and oversight.” The cost can be reputation or major legal fees.
Meanwhile white collar crime prosecutions fell to their lowest level in the past 30-plus years, according to a report from Syracuse University. Is there enough to disincentivize business misconduct?
As an employee:
There’s interesting research about how one employee’s misconduct can impact others on their team. It found that “financial advisors are 37% more likely to commit misconduct if they encounter a new co-worker with a history of misconduct.”
Here are some guidelines / advice on how companies should think about their clawback policies.
As a citizen:
The U.S. Department of Justice prosecutes a lot of business misconduct, doling out more punishment, typically, than boards of directors do through clawbacks. Currently led by AG William Barr, this election will help decide who will lead the DoJ over the next four years.
Please remember to *VOTE*!
As an investor:
Some investors have pressured publicly traded companies to add clawback policies. For example, “CalPERs encourages companies to have clawback policies covering fraud, inadequate oversight, misconduct including harassment, or gross negligence that is reasonably expected to impact financial results or cause reputational harm.”
Proxy advisory firms are also getting into the mix. In some cases, having clawback policies strengthens the “Governance” score in companies’ ESG ratings.
As a consumer:
Some books to learn more: Big Dirty Money (2020) by Jennifer Taub, Too Big to Jail (2014) by Brandon L. Garrett, and Corporate Crime and Punishment: The Crisis of Underenforcement (2020) by John C. Coffee Jr.
Read this to get a good grounding in thinking about corruption in business.
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