Let’s Get Real Clawbacks From the Banks

Oct. 5 (Bloomberg) -- The financial crisis began in 2008. How many cash bonuses and equity awards have been reclaimed from the most senior banking executives who caused it? None that I can ascertain from required financial disclosures.

Of course, some executives experienced the ultimate clawback: losing their jobs and watching their unvested stock and unexercised stock options vanish to bankruptcy, creditors or worthlessness. But as for all the cash bonuses and stock that have already been paid out for illusory earnings and revenue based on valueless investments, little or nothing has been recouped.

So what can we expect from the latest round of bank-value destruction and scandals, including JPMorgan Chase & Co.’s London trading losses; Barclays Plc’s Libor manipulation; HSBC Holdings Plc’s money laundering and mis-selling of payment protection and interest-rate insurance; and Standard Chartered Plc’s Iran dealings?

Again, some have paid the price with their jobs. Robert Diamond resigned as Barclays’s chief executive officer and Ina Drew quit as JPMorgan’s chief investment officer as a direct result of the events that caused losses or scandal -- or both -- for their former employers.

Both executives lost a significant amount of future compensation. But neither has had vested compensation clawed back. Thus far, based on the absence of filings with the Securities and Exchange Commission, no senior executive in the U.S. has had to return compensation that has already been paid out as a result of excessively risky investments, violations of ethics codes, or behavior that regulators judged to be illegal.

Executives Remain

Not all CEOs or other executives who might be considered responsible have left their companies. Peter Sands is still at the helm of Standard Chartered. Jamie Dimon not only remains as JPMorgan’s CEO, but successfully resisted attempts to strip him of his chairmanship this year.

At HSBC, the current CEO, Stuart Gulliver, took over in 2011 -- after the period that, according to a U.S. Senate investigation, the bank was laundering money. But with 30 years of international experience at HSBC, more recently at very senior levels, and a board member of the parent company since 2008, it isn’t credible that Gulliver can escape blame, though his predecessor, Stephen Green, currently the U.K. trade and investment minister, is more culpable.

Given the latest wave of scandals, it seems clear that increased internal and external oversight and regulation haven’t lowered levels of risky or illegal behavior in banks. The threat from Mitt Romney that he would seek repeal of the Dodd-Frank law if he were elected should be of major concern to shareholders. Getting rid of the legislation, which hasn’t yet been fully enacted, would reduce oversight when it seems clear that banks need more regulation, not less.

The only way such behavior can be checked is for it to affect executives’ paychecks. At many institutions, clawbacks come into play only in the event of a financial restatement. But the actions that led to the crisis didn’t lead to a revision of financial statements; far worse, the result was massive and, in some cases, permanent destruction of value. Even though arguably there should have been restatements, without them no pay has had to be returned.

Just as with financial restatements, it can be objectively determined whether banks sold credit-default swaps based on rotten loans; laundered money; manipulated interest rates; and took excessive risks. There is no reason these actions shouldn’t be added to the list of what causes a clawback.

The provisions for recouping pay were mandated by the Dodd-Frank Act, though the SEC has yet to carry out this part of the law. Many U.S. companies have voluntarily adopted them, though most apply only in the event of a financial restatement.

Bank Provisions

The best of the clawback provisions require pay to be returned even if the executive wasn’t directly responsible for the accounting fraud that led to a restatement. In the same way, incentive pay should be returned if it was earned by senior managers who were in their jobs when negligent risk-taking, money laundering or rate manipulation occurred. This should be the case whether they knew about the behavior or not. Ultimate responsibility for wrongdoing of this magnitude lies at the top of an organization, both in the executive suite and on the board. Even without direct complicity, the actions occurred due to a lack of oversight.

The recent cases would seem to indicate that banks’ clawback provisions are ineffective, insufficient or nonexistent. This isn’t so. Though compensation hasn’t been recouped, all the banks involved -- even JPMorgan, which has looser governance standards than European banks -- say they can take back or cancel incentives in the event of illegal or damaging behavior.

With these provisions in place at Standard Chartered, HSBC, Barclays and JPMorgan, why are we still waiting for significant clawbacks to be announced for employees directly involved in risky behavior and illegal activity, as well as for the managers supervising them?

(Paul Hodgson is the chief research analyst at GMI Ratings, which evaluates environmental, social, governance and accounting risk at public companies. The opinions expressed are his own.)

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To contact the writer of this article: Paul Hodgson at

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