In the aftermath of the financial meltdown, a considerable amount of public outrage was directed at banking executives who walked away from taxpayer-protected institutions they pillaged with enormous bonuses. Roughly a half-decade later, calls are growing louder to make sure that doesn’t happen again.
In a letter to the Securities and Exchange Commission on Tuesday, ten different organizations including think tanks, labor unions, and public interest groups, called for new rules aimed at snatching short-term bonuses away from executives responsible for long-term rot.
“The premise of this statutory provision involves no controversy. Incentive compensation based on results that are later proven false should be returned,” the groups, including Public Citizen, the AFL-CIO, and Demos, said in their letter to SEC Commissioner Mary Jo White.
A provision in the Dodd-Frank Wall Street reform law, passed in 2010, requires the SEC to formulate new rules “to recoup incentive compensation” if a company’s financial results are less stellar than previously reported. The sweeping legislation also seeks to allow shareholders to file lawsuits to obtain “claw backs.”
But while most major companies have these “claw back” rules in place, as the groups note in their letter, there is no real enforcement mechanism for company shareholders to enforce them.
Nor is their much information for the public to judge whether the policy is effective. Prior actions to recover undeserving bonuses have been shrouded in secrecy. JP Morgan Chase’s London Whale fraud led to compensation claw backs on three traders. The amount recouped, however, was not disclosed.
The authors note that transparency will play an important role in future enforcement, and called on the SEC to require “full public disclosure of claw backs.”
The groups also called for a “broad definition” of “executive” to include not just the company’s president or vice president, but also those “in charge of a principal business unit, division or function, any other officer who performs a policy making function, or any other person who performs similar policy making functions.”
A similar “claw back” provision was codified into law in 2002 as part of the Sarbanes-Oxley Public Company Accounting Reform and Investor Protection Act. However it, like internal company policies, lacked enforcement teeth.
Although there’s been as many as 1,500 financial restatements since 2002 that could trigger a return of bonuses, only eight executives actually complied and gave money back to shareholders.
“A stronger and more robustly enforced policy is clearly needed,” the group said in their letter.
In December 2014, the SEC released its agenda for this year, setting a target date of October 2015 to propose new rules on compensation claw backs. The agency, however, has routinely missed rulemaking deadlines.
Other Dodd-Frank mandated rules, such as limits on CEO-to-employee pay ratios, were expected to be completed by the SEC at the end of last year, but have been delayed, and likely won’t be proposed until sometime later this year.
The agency is required to formulate rules for more than 90 provisions contained in the Wall Street reform law. It also has discretion authority to create dozens more regulations. So far, however, the SEC has only finalized 56 of those rules. It also missed the deadline for implementation on 27 others.
