The continuing stream of corporate wrongdoing and risk failures—at Wells Fargo & Co., Volkswagen AG, Equifax, Uber Technologies, Mylan, and others—gives new urgency to two questions: Should boards have broader policies for triggering compensation adjustments, forfeitures, and repayment of past compensation—generally referred to as recoupments or clawbacks—when corporate harm is demonstrated? How should boards exercise discretion when they implement such policies?
Regulators today require relatively narrow clawback policies, triggered mainly in the event of a restatement of financials. But a strong business case can be made that corporate harms of many kinds should qualify as triggers for clawbacks.
Many harms have little relation to financial restatements. In the months after Wells Fargo was found to have set up over 1.5 million unauthorized deposit accounts and another 560,000 unauthorized credit card accounts, the stock plunged over 20 percent. Market cap fell $30 billion and the loss of business, legal fees, and exposures continue to mount. The company did not have to restate earnings, but its actions tarnished its brand and hurt shareholders financially. In the aftermath, shareholders and the public at large called for some action to be taken against executives who caused or benefitted from these wrongdoings.