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Clawback in Action – the Wells Fargo Cautionary Tale

  • Sep 29 / 2016
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Blog, SEC

Clawback in Action – the Wells Fargo Cautionary Tale

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Wells Fargo has officially announced that it will be clawing back $41 million from CEO John Stumpf, and an additional $19 million from former community-banking head Carrie Tolstedt, in the form of unvested equity awards.

With the increase of “say-on-pay”, where investors demand the right to vote on executive compensation, and pressure from proxy advisory firms such as ISS, clawback provisions are increasingly found in equity compensation plans. Yet, clawbacks are much more common on paper than in practice.

The Wells Fargo clawback provisions can be triggered by misconduct that does reputational harm to the bank; improper or grossly negligent failure, including supervisory capacity, to monitor or manage material risks to the bank or business group; and a material failure of risk management, among others. Given the apparent expanse of the retail bank’s fraud and size of the scandal it has created, the decision to invoke the clawback may seem unsurprising. And yet, this move comes only after intense scrutiny by the US Senate Banking committee and after the House Financial Services Committee scheduled an additional hearing for today.

The bank’s initial reaction to the scandal was to tout the fact it had fired 5,300 employees over five years for opening about 2 million accounts using fake information, or in clients’ names without their knowledge. The Senate Committee, however, led aggressively by Senator Elizabeth Warren, found that the actions taken glaringly ignored any accountability for senior executives. As of that time, the CEO had not made any statement on compensation clawback. Though Senator Warren excoriated Stumpf for what she termed “gutless leadership”, there was bipartisan outrage, and Republican Rep. Jeb Hensarling, the chairman of the Financial Services Committee later said to reporters “If I was a shareholder, I’d be outraged if there weren’t clawbacks”.

This case highlights the fact that clawbacks may be easy to put on paper, but just like breaking up, clawbacks are hard to do. In fact, despite the financial system collapse and recent recession, no other large bank CEO has actually been subject to a clawback. Even after the J.P. Morgan Chase & Co. London Whale trading scandal, the 2012 compensation for chief James Dimon was cut in half (from$23.1 million to $11.5 million), but there was no clawback on his equity awards. Three traders and other executives were subject to maximum clawbacks.

As reported by the Wall Street Journal (note 1), the human-resources consulting group Overture Group LLC estimates that the $41 million forfeit by Mr. Stumpf will represent about a quarter of the compensation he’s earned over his tenure at the bank. Wells Fargo has also said that the board is leading an independent investigation that will determine if additional actions are necessary, such as forfeiture of the about $35 million in unvested options currently held by Ms. Tolstedt.

As this case continues to unfold, it may provide the first true example of top-executive level equity award clawbacks in action. It should serve as a reminder to institutions with clawbacks that they are not intended just as a “check the box” measure to pass say-on-pay, but must come with a commitment to use them as necessary. Beyond language in the award agreement, companies must have clearly defined internal metrics for when clawbacks will apply, and a process in place to invoke the provision. The Wells Fargo cautionary tale shows that both the US government and US shareholders are taking clawbacks seriously, – issuers beware – this may finally be the era where companies are held to the lip service paid to executive compensation that truly reflects corporate behavior and performance.

Elena Thomas is Head of Operations and Strategy for Plan Management Corp.

1. Glazar, Emily. “Wells Claws Back CEO Pay”. The Wall Street Journal 28 Sept 2016: A1-2. Print.

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