More on Clawbacks, Message Apps

We have more details today on the Justice Department’s new policies for compensation clawbacks, and how prosecutors will expect companies to govern employees’ use of “ephemeral messaging apps” as part of compliance settlements. 

The news came from assistant attorney general Kenneth Polite, who spoke today at a white-collar crime conference in Miami. His remarks filled in more details from a previous speech that his boss, deputy attorney general Lisa Monaco, delivered to the same group on Thursday. 

In her speech, Monaco announced the launch of a pilot program to evaluate companies’ “compliance-promoting criteria” within their compensation and bonus programs as part of corporate misconduct settlements. She also said the department will encourage companies to seek clawbacks of pay awarded to executives involved in misconduct, crediting those amounts against any monetary penalties you might incur as part of your settlement.

So how will all that work in practice? Polite’s speech colored in the details — including important points about the credit a company might still receive even for unsuccessful clawback efforts. 

First, to be eligible for the clawback program at all, a company must fully cooperate with any Justice Department investigation and timely and appropriately remediate the misconduct. What’s notable here is that Polite did not expressly say that a company must also voluntarily self-disclose the misconduct too. Maybe that was an oversight, but considering how often Polite and other Justice Department officials preach the gospel of voluntary self-disclosure — I mean, Polite even praised self-disclosure in this same speech a few minutes earlier — my first assumption is that you can still be eligible for the clawback program even without self-disclosure. We’ll try to confirm.

Second, when pursuing clawbacks, the Justice Department expects companies to pursue not only employees who engaged in the misconduct in question, but also those who had supervisory authority over the employees or business area engaged in the misconduct, “and knew of, or were willfully blind to, the misconduct,” Polite said. 

If a company meets all those factors and has launched clawback proceedings at the time of resolution to recover the compensation, then prosecutors will accord an additional fine reduction equal to however much compensation you recoup within the resolution term. 

That last part strikes me as important, because most resolution terms with the Justice Department are three years. So you’d have three years to get that money back, or presumably your credit against other monetary penalties disappears. Considering that some employees might challenge clawback efforts in court (especially if they’re senior executives with equity awards worth tens of millions), that does raise the specter of some clawback credits dying when the clock runs out.

What happens then? In that case, Polite said, “if a company’s good-faith effort is unsuccessful by the time the resolution term ends, our prosecutors will have discretion to accord a fine reduction of up to 25 percent of the amount of compensation that has been sought.”

My immediate question: could circumstances ever arise where pursuing clawbacks might not be worth the effort? 

That is, could the expense of a court fight, over what might be a relatively small amount of money, which could drag out for years and leave you with only a 25 percent reduction rather than a full dollar-for-dollar credit, lead some companies to conclude it’s not worth the bother? After all, when we talk about “shareholder money,” it’s shareholder money paying for all those litigation costs too. 

Polite seemed to acknowledge that possible outcome:

We are not trying to incentivize waste. To the contrary, companies should make an assessment about the potential cost to shareholders and prospect of success of clawback litigation, given any applicable laws, and weigh it against the value of recoupment – and proceed in accordance with their stated corporate policies on executive compensation.

Much more on all this next week. For now, that’s how the clawback program is shaping up so far. 

Ephemeral Messaging Efforts

Polite also announced that the Criminal Division is updating its guidelines for the evaluation of corporate compliance programs, to include new policies about how companies govern employees’ use of “ephemeral messaging” apps. 

These apps (SnapChat, WhatsApp, and others) have been a sore point with the Justice Department for some time, because they allow messages to disappear — which is a huge threat to successful investigations, and a violation of companies’ record-keeping obligations to boot. Regulators whacked a bunch of Wall Street banks last year to emphasize that point, fining 16 banks a total of more than $1 billion.

Under the revised guidelines, Polite said, “we will consider how policies governing these messaging applications should be tailored to the corporation’s risk profile and specific business needs and ensure that, as appropriate, business-related electronic data and communications can be preserved and accessed.” Prosecutors will also consider how companies communicate such policies to employees, and whether companies enforce those policies on a consistent basis.

“We will ask about the electronic communication channels used by the business and their preservation and deletion settings,” Polite continued. “And we’ll ask about any bring-your-own-device, or BYOD program, and associated preservation policies.”

Moreover, if your company is under investigation and has not produced communications from those messaging apps, “prosecutors will not accept that at face value,” Polite said. Instead, they will probe the company’s ability to access those communications, whether the messages are stored on corporate devices or servers.

Again, Radical Compliance will have much more about all this next week and for a long while after that. For now, it seems like compliance officers have plenty to keep you busy.