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Legal Commentary

: Prawfs

Recouping Bonuses From Innocent Executives

By Dan Markel, Ethan Leib, Rick Garnett, Matt Bodie, Paul Horwitz , Steve Vladeck, and Orly Lobel

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This post, the second in a series about recouping executive compensation, looks at the SEC's recent action to recoup bonuses from an executive who was not charged with misconduct. This SEC action is the first to use the SOX 304 clawback provision this freestanding way. The story has started to make the rounds of the blogs and op eds and many (Ribstein, WSJ) but not all (Conglomerate) criticize the move for penalizing innocent executives. I explore two slightly different questions after the jump: How much does the same debate apply to the legislation implementing TARP, which also has a clawback provision? and How does agency law fit in?

So, first, how much do concerns about "innocent executives" apply to the legislation implementing TARP, which also has a clawback provision? The TARP-related provision also does not seem to require that the executive be responsible for the materially inaccurate earnings statements, etc., that trigger the clawback power - the aspect that seems to have triggered the most outrage in the blogs and op eds about SOX 304. To that extent, the debate may be relevant.

But the implementation strikes me as quite different. The TARP-related clawback provision includes this language:

"The Secretary shall require that the financial institution meet appropriate standards for executive compensation and corporate governance" including "a provision for the recovery by the financial institution of any bonus or incentive compensation paid to a senior executive officer based on statements of earnings, gains, or other criteria that are later proven to be materially inaccurate." EESA 111

"A provision for the recovery" is a bit of an awkward construction, but I read it as pushing TARP recipients to include clawback provisions in employment policies or individual employment contracts and enforce it that way. (Those of you deep in the weeds of EESA can correct me.) So the enforcement might include arguments about whether the company had provisions in place or the employee's contractual rights, as much as statutory interpretation and institutional powers.

Another question I have is how much holding the CEO or CFO responsible is already reached by agency law? After all, respondeat superior already reaches "innocent executives" because it doesn't require personal involvement in the conduct. Maybe the simple answer is that the CEO isn't the employer, so that there is no agency relationship. But at the very least, we should be used to mechanisms that penalize because of a person's position or relationship. The question in the SEC case is then whether it is good policy to enforce this way or, as Usha Rodrigues points out on the Glom, whether the SEC can/should change interpretation midstream.

Full post as published by Prawfs on August 12, 2009 (boomark / email).