Last month, on the same day the DOJ and SEC imposed $3.3 billion in financial penalties against Goldman Sachs for 1MDB-related FCPA violations, Goldman’s board announced a plan to claw back $174 million from former and current executives. With Goldman in mind, let’s look at how clawbacks work, and whether they’re a good idea.
1. What’s the legal basis for clawbacks in FCPA cases? Clawback provisions in executive employment agreements are now common. They typically allow a company to recover previously paid compensation or withhold future compensation in cases of “intentional misconduct or grossly negligent conduct.”
If there is no clawback provision in the employment agreement, a company may have a civil cause of action for recovery — for example, by asserting victims’ rights. That isn’t easy and rarely done, so I’ll focus on contractual clawback rights.
2. Do corporate FCPA defendants automatically win “cooperation credit” from the feds for imposing clawbacks? No, but . . . .
The DOJ and SEC have never publicly said they require or expect companies to impose clawbacks in FCPA cases. Clawbacks aren’t mentioned in the Federal Sentencing Guidelines, the FCPA Resource Guide, the DOJ’s FCPA Corporate Enforcement Policy, or the Justice Manual (formerly the U.S. Attorneys Manual). Nor have I found any discussion of clawbacks for FCPA offenses in speeches or other policy statements from anyone authorized to speak for the DOJ or SEC.
For now, then, let’s assume the DOJ and SEC don’t require or expect companies to impose clawbacks against executives in FCPA cases to win full cooperation credit.
3. But, do clawbacks help companies resolve FCPA cases? Probably. The DOJ’s FCPA Corporate Enforcement Policy (CEP) at 9-47.120 discusses cooperation credit for “appropriate remediation in FCPA matters.”
Although not listed as “appropriate remediation,” clawbacks fit nicely into this CEP remediation category:
Appropriate discipline of employees, including those identified by the company as responsible for the misconduct, either through direct participation or failure in oversight, as well as those with supervisory authority over the area in which the criminal conduct occurred.
And into this CEP remediation catchall:
Any additional steps that demonstrate recognition of the seriousness of the company’s misconduct, acceptance of responsibility for it, and the implementation of measures to reduce the risk of repetition of such misconduct, including measures to identify future risks.
What’s it all mean? When the DOJ is evaluating a company’s case for cooperation credit, clawbacks could tick boxes under the FCPA Corporate Enforcement Policy for “appropriate discipline of employees” and for “additional steps that demonstrate the recognition of the seriousness of the company’s misconduct.”
4. Are companies that have contractual clawback rights required to use them in FCPA cases? No, imposing clawbacks is at the discretion of the company (that is, the board of directors).
For example, Walmart reportedly had contractual clawback rights. Still, it didn’t exercise them in connection with its $282 million FCPA resolution in 2019, even though the SEC’s findings suggested lapses in oversight and control. From 2000 through 2011, Walmart’s subsidiaries in Brazil, China, India, and Mexico “operated without a system of sufficient anti-corruption related internal accounting controls.” the SEC said.
In contrast, Goldman Sachs’ board decided to exercise the company’s clawback rights “in light of the findings of the government and regulatory investigations and the magnitude of the total 1MDB settlement.”
The Goldman directors unequivocally said, “. . . none of the past or current members of senior management were involved in or aware of the Firm’s participation in any illicit activity at the time the Firm arranged the [1MDB] bond transactions.”
But the board’s announcement also described the clawbacks as “appropriate” and “in acknowledgement of the Firm’s institutional failures.”
Goldman’s clawback announcement echoed language in the DOJ’s FCPA Corporate Enforcement Policy about “appropriate discipline of employees” and taking “additional steps that demonstrate recognition of the seriousness of the company’s misconduct.”
5. Are clawback provisions in employment agreements a good idea? As always, there are unintended consequences.
Current or prospective executives might respond to clawback risks by raising their salary demands. So-called “clawback premiums” inflate executive compensation, thereby hurting shareholders while benefiting the executives.
Talented job candidates and existing employees might migrate to companies where clawbacks don’t threaten them. In a 2017 domestic bribery case, United Airlines said it wouldn’t impose executive clawbacks because doing so would hurt its ability to recruit future executives. (Thanks to Tom Fox for the United example.)
And this: If a company has clawback rights but doesn’t exercise them, is there a negative implication the board is protecting culpable executives?
Finally, boards are reportedly reluctant to enforce clawbacks. Why? Because directors are uncomfortable “adjudicating” guilt. They aren’t equipped for the task. They could be accused of selective enforcement, or denying due process, and so on. There’s even a risk executives will turn the tables. Did the board itself provide proper supervision and oversight? If not, then perhaps it lacks equitable standing and moral authority to blame anyone else for the same offenses.
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