Executives Will Pay For Dirty Deeds
City Comptroller John C. Liu announced that the NYC Pension Funds have reached agreements with Capital One Financial Corp., Citigroup, and Wells Fargo & Co. to expand their policies on “clawbacks” to cover misconduct that causes financial or reputational harm.
The agreements are in line with a new best practice established last year by three major banks and further raise the bar on accountability by strengthening companies’ disclosure of actual clawbacks above and beyond what may be legally required.
“Executives need to be held financially accountable for misconduct that harms the company, and that includes improper behavior and reckless risk-taking by those they manage,” Liu said. “This is a vital step toward reining in out-of-control executive pay based on short-term gains. We commend these banks for strengthening the link between compensation and business integrity, which is central to creating long-term value, and for setting new standards of disclosure.”
All three banks adopted new policies empowering their respective boards of directors to recover, or “claw back,” incentive pay from executives who are responsible for misconduct that causes serious financial or reputational harm to their company, either through their actions or through a failure to supervise others.
Previously, the boards could generally only claw back pay from executives who committed intentional or gross misconduct-a higher threshold that generally also results in termination- or in the event of a financial restatement.
The companies are also believed to be the first to adopt policies re- garding disclosure of clawback actions taken, with the strongest commitment coming from Capital One. In the event of a clawback, Capital One will disclose the total amount clawed back in connection with any event, so long as the underlying event has already been publicly disclosed to investors.
Wells Fargo and Citigroup have committed to consider disclosure of their clawbacks on a case by case basis. Wells Fargo’s board “will determine whether and to what extent public disclosure of information regarding such clawback or recoupment, including the amount of compensation and the executive(s) impacted, is appropriate.” Similarly, Citigroup will consider making public disclosures whenever a decision has been made to cancel deferred compensation payable to a senior executive responsible for costly misconduct.
The NYC Pension Funds and Liu had filed shareowner proposals at the three banks, but withdrew them after the banks’ adopted significant changes to their current clawback policies. The banks have each paid hefty fines in recent years to settle allegations of deceptive or improper business practices.
The new policies are intended to serve as deterrent to future violations company policy or law.
In 2012, Liu and the NYC Pension Funds reached agreements with Goldman Sachs, JPMorgan Chase, and Morgan Stanley regarding their clawbacks. The banks clarified that their clawback policies cover not just employees who engaged in reckless risk-taking or misconduct but also their supervisors.
Liu serves as the investment advisor to, custodian, and trustee of the New York City Pension Funds. The New York City Pension Funds are composed of the New York City Employees’ Retirement System, Teachers’ Retirement System, New York City Police Pension Fund, New York City Fire Department Pension Fund, and the Board of Education Retirement System.
The New York City Pension Funds held a combined 20,795,019 shares of Capital One, Citigroup, and Wells Fargo valued at $867,595,449.42 as of last Tuesday, Mar. 12.
