Compensation & Misconduct: Two Examples

Everyone is buzzing these days about the Justice Department’s new ambitions to include executive compensation plans and disciplinary policies as part of effective corporate compliance programs, so today let’s review two recent enforcement actions that department officials have cited as examples: Danske Bank and Safran. 

Both cases were resolved in December. Danske Bank pleaded guilty to allowing its Estonia branch to run the largest money-laundering scheme in history, paying $2.4 billion in penalties and implementing a raft of compliance reforms. Safran, a French aerospace business, received a declination to prosecute, although it did agree to disgorge $17.9 million in ill-gotten profits from a corruption scheme involving a Safran acquisition that had bribed government officials in China.

Two very different cases, with very different resolutions — and yet, both cases also included stipulations about executive compensation plans and disciplinary efforts that are exactly on point with the new Justice Department policies announced last week. Deputy attorney general Lisa Monaco cited Danske Bank as an example during her speech last Thursday; assistant attorney general Kenneth Polite then cited Safran in a speech he delivered the following day. 

Let’s start with Safran, because that’s the simpler example of the two. The Justice Department sent a letter to the company’s attorneys just before Christmas outlining eight factors that led prosecutors to decide against prosecution. The fourth factor, emphasis added:

“Safran’s timely and full remediation, including termination of a remaining employee involved in the misconduct, withholding the deferred compensation of another employee involved in the misconduct who had previously left the company, and efforts to enhance its anti-corruption training and compliance program.” 

That’s all we have for this case. It’s not much. Polite did cite Safran in the speech he gave last week about the department’s new policies — “In the December 2022 declination issued to Safran S.A., we specifically noted that the company’s timely and full remediation included the withholding of deferred compensation of a former employee involved in the misconduct” — but that one sentence is all he said about Safran. 

Given all the other factors that weighed in favor of going easy on Safran, we don’t really know how important this specific step of withholding pay was to the Justice Department’s overall decision not to prosecute. Regardless, there it is.

Danske Bank’s Compensation Terms

The Danske Bank settlement is a better example because it discusses both disciplinary procedures and executive compensation. Let’s start with discipline. 

As outlined in the plea agreement, Danske Bank will implement appropriate disciplinary procedures, and “such procedures should be applied consistently and fairly, regardless of the position held by, or perceived importance of, the director, officer, or employee.” 

Unfortunately that’s all we have, and again it’s not much. The Danske Bank settlement says nothing about how the bank will apply its disciplinary procedures consistently and fairly, nor how the bank will confirm said consistency and fairness — say, through an audit or some other assessment of the disciplinary program. Perhaps one could say such assessments are implied as part of the periodic reviews and reports that Danske Bank will be making about its compliance program for the next several years, but nothing is said expressly along those lines.

We do have more fulsome details in how Danske Bank will need to structure its executive compensation programs to support compliance. The plea agreement devotes a full paragraph to the subject:

The bank will implement evaluation criteria related to compliance in its executive review and bonus system so that each bank executive is evaluated on what the executive has done to ensure that the executive’s business or department is in compliance with the compliance programs and applicable laws and regulations. A failing score in compliance will make the executive ineligible for any bonus for that year. 

The bank will include in its evaluation criteria and bonus system provisions that allow the bank to implement measures to incentivize future compliant behavior and discipline executives for conduct occurring after the filing of the agreement that is later determined to have contributed to future compliance failures.

OK, that’s all fine as a generic description of Danske Bank’s steps; but how would other companies implement similar concepts in your own organization? 

For example, you would need to define what those “evaluation criteria related to compliance” in your executive review and bonus system actually are. If we take the Justice Department seriously that it wants to see a culture of compliance, then your criteria might be how an executive handles allegations of misconduct on his or her team: the disciplinary actions that executive recommends, or the speed with which he or she helps an internal investigation go forward, and so forth.

You’d also need to consider negative criteria, such as punishing the executive when he or she engages in a compliance violation directly. 

I’m also curious about the scoring system Danske Bank is supposed to develop. What would a failing score be? Would some gestures count as extra credit, to push an executive back into passing territory just before a big bonus? Would some infractions generate an automatic F? 

Finally there’s this question: if companies start tying executive compensation to ethical standards, should those standards be disclosed in the proxy statement? 

That’s not likely to cover too many executives, since only named executive officers have their compensation plans disclosed in the proxy. But those disclosures include incentive-based performance goals; and to what extent those goals were met, missed, or adjusted so that execs could get the incentive pay even when they missed their goals. So will we see more companies disclosing the ethics and compliance criteria they use to judge incentive-based pay? 

Stay tuned. When more settlements arrive, we’ll be all over them.