Q. I own stock in a company that saw its share price plunge after previously hidden problems came to light, resulting in a restatement of earnings for two previous years. The CEO apologized and took “full responsibility” for not knowing about all this, but he and other executives haven’t offered to return any of the huge bonuses they got when the stock was flying high. Your thoughts, please.
SEE ALSO: The Money and Ethics Quiz
A. I would like to see senior executives in such situations offer truly voluntary restitution, which is what "taking responsibility" should mean. But this almost never happens. Even the seemingly voluntary giveback of bonuses by a few executives at AIG -- bailed out by U.S. taxpayers in 2008 -- occurred in the glare of negative publicity.
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Under federal mandates (Sarbanes-Oxley, and soon, Dodd-Frank), most publicly traded companies today have "clawback" provisions in their executive employment contracts, enabling their boards to seek return of past pay when things go seriously wrong.
But boards rarely initiate this -- a sign of their being too cozy with senior managers, their supposed servants. Most cases of restitution have resulted from Securities and Exchange Commission action ($468 million from the former head of UnitedHealth Group), criminal prosecution (against Tyco's former CEO, for example) or the threat of protracted civil litigation (the recent $104 million settlement with former partners of law firm Dewey & LeBoeuf). Huge trading losses at UBS and JPMorgan Chase are likely to trigger clawback rules at those banks, but it's unclear how far up the executive ladder the restitution will go.
Most corporations try to avoid the acrimony of forced clawbacks by not paying cash bonuses after the books close each year. Instead, they use a variety of deferral methods -- restricted stock and options that can't be sold or exercised for several years, or cash bonuses paid into accounts that can't be tapped for several years and can be docked if an executive's actions are later found to have caused big losses.
These are small steps in the right direction.
Research was performed by editorial intern Ted Leonhardt from Duke University. Have a money-and-ethics question you'd like answered? Write to editor in chief Knight Kiplinger at ethics@kiplinger.com.
This article first appeared in Kiplinger's Personal Finance magazine. For more help with your personal finances and investments, please subscribe to the magazine. It might be the best investment you ever make.
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