The Advisors' Blog

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September 19, 2022

Clawbacks: First-Ever DOJ-Wide Policy Reinforces Role in Compliance

The DOJ is adopting its first-ever Department-wide policy to guide prosecutors on considering corporate compensation programs & clawback policies in criminal enforcement decisions, according to a 15-page memo from Deputy AG Lisa Monaco released late last week and described in these remarks at NYU.

The memo says that “although an effective compliance program and ethical corporate culture do not constitute a defense to prosecution of corporate misconduct, they can have a direct and significant impact on the terms of a corporation’s potential resolution with the Department” – and prosecutors will now consider compensation structures as a factor in that evaluation. This excerpt explains the details:

Corporations can best deter misconduct if they make clear that all individuals who engage in or contribute to criminal misconduct will be held personally accountable. In assessing a compliance program, prosecutors should consider whether the corporation’s compensation agreements, arrangements, and packages (the “compensation systems”) incorporate elements such as compensation clawback provisions-that enable penalties to be levied against current or former employees, executives, or directors whose direct or supervisory actions or omissions contributed to criminal conduct. Since misconduct is often discovered after it has occurred, prosecutors should examine whether compensation systems are crafted in a way that allows for retroactive discipline, including through the use of clawback measures, partial escrowing of compensation, or equivalent arrangements.

Similarly, corporations can promote an ethical corporate culture by rewarding those executives and employees who promote compliance within the organization. Prosecutors should therefore also consider whether a corporation’ s compensation systems provide affirmative incentives for compliance-promoting behavior. Affirmative incentives include, for example, the use of compliance metrics and benchmarks in compensation calculations and the use of performance reviews that measure and reward compliance-promoting behavior, both as to the employee and any subordinates whom they supervise. When effectively implemented, such provisions incentivize executives and employees to engage in and promote compliant behavior and emphasize the corporation’s commitment to its compliance programs and its culture.

Prosecutors should look to what has happened in practice at a corporation-not just what is written down. As part of their evaluation of a corporation’s compliance program, prosecutors should review a corporation ‘s policies and practices regarding compensation and determine whether they are followed in practice. If a corporation has included clawback provisions in its compensation agreements, prosecutors should consider whether, following the corporation’s discovery of misconduct, a corporation has, to the extent possible, taken affirmative steps to execute on such agreements and clawback compensation previously paid to current or former executives whose actions or omissions resulted in, or contributed to, the criminal conduct at issue.

Finally, prosecutors should consider whether a corporation uses or has used non-disclosure or non-disparagement provisions in compensation agreements, severance agreements, or other financial arrangements so as to inhibit the public disclosure of criminal misconduct by the corporation or its employees.

As a whole, the memo outlines a wide-ranging overhaul to DOJ policies that will affect cooperation credit and enforcement decisions. It’s the culmination of a year-long review by the “Corporate Crime Advisory Group” – with input from experts including audit committee members, in-house attorneys, compliance & ethics practitioners and more. The memo’s bottom-line theme is that the DOJ wants to hold executives and other involved individuals responsible for corporate misconduct.

Deputy AG Monaco has directed the Criminal Division to develop further guidance by the end of the year on how to reward corporations that develop and apply compensation clawback policies, including how to shift the burden of corporate financial penalties away from shareholders – who in many cases do not have a role in misconduct – onto those more directly responsible.

Companies should consider the elements listed in this memo and the forthcoming guidance as they take a closer look at their clawback policies, compensation programs, and related employment agreements & policies. You should already have some time reserved on your calendar and board agendas to review those items, since we’re expecting final Dodd-Frank clawback rules from the SEC any time now, and the Commission’s Enforcement Division has said that executives should be “on notice” that it is committed to using using SOX 304 clawbacks to incentive a culture of compliance. The DOJ’s new stance makes it all the more important.

We’ll be sharing critical guidance on how to prepare for the new clawback rules and navigate the current enforcement environment at our “Proxy Disclosure & 19th Annual Executive Compensation Conference” this October. In particular, our session on “Clawbacks: Preparing for Final SEC Rules” – with Davis Polk’s Kyoko Takahashi Lin, CompensationStandards.com’s Mike Melbinger, Gibson Dunn’s Ron Mueller, and Hogan Lovells’ Martha Steinman – will give you practical action steps to take now. Here’s the full agenda for the Conferences – 18 essential sessions over 3 days. Sign up online, email sales@ccrcorp.com, or call 1-800-737-1271. We’re also posting other resources and practical guidance in our “Clawbacks” Practice Area for members.

Liz Dunshee