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Why are we still not punishing bosses for failure?

Last week something unusual happened. A CEO who presided over a corporate failure in the UK has been fined.

The case in question was particularly egregious: the collapse of construction company Carillion in 2018 with liabilities of £7 billion and £29 million in cash. God Fines for directors? At less than £400,000 a piece, maybe not so much.

These were regulatory fines for a very specific part of the Carillion saga, and are still subject to appeal by the executives involved. But even when it comes to boards and investors holding managers to account for performance deficiencies, the evidence suggests that directors don’t receive much punishment.

The board’s usual mechanism for punishing executives – other than firing them – is through the use of so-called escape and clawback provisions linked to bonus eligibility. To summarize these simply, malus rules allow a company to withhold an unpaid bonus; clawback to recover one that has already been issued. Although these provisions began life in the financial services sector after the banking crisis, they are now a standard feature of almost all large companies.

The problem is that it is not clear that they work.

There are several examples of similar provisions being used in the US. Wells Fargo returned tens of millions of dollars from two executives over a mock accounting scandal in 2016. Last year, ousted McDonald’s boss Steve Easterbrook forfeited $105 million after he “failed. . . uphold McDonald’s values” (he claimed to have had multiple sexual relationships with employees and then lied about it to the board). But there are very few in Britain.

Awards tend to be suspended during regulatory and other investigations. Barclays earlier this year suspended a £22m share grant to former chief executive Jess Staley while City watchdogs probe Staley’s characterization of his relationship with pedophile Jeffrey Epstein.

But they still get paid in the end. Last week, banking group Lloyds decided not to match awards to former boss Antonio Horta-Osorio for his handling of compensation for the HBOS Reading scandal, after the bank took another provision last financial year (Horta-Osorio gave up an initial award in 2019 when a review first found flaws in the process the compensation).

There are two high-profile cases where boards have used the powers in recent years.

Last year, an advertising company WPP said it would use adjustments from Elus withdraw share awards due to former CEO Sir Martin Sorel, alleging he leaked customer information. Sorel said at the time he would appeal that decision. And in 2020, mining group Rio Tinto cut the bonus of then-boss Jean-Sébastien Jacques after the company A 46,000-year-old aboriginal site was blown up.

In Rio’s case, the problem was that removing a £2.7m bonus paled somewhat in comparison to the £27m one proxy adviser estimated the chief executive still held in performance shares. Institutional Shareholder Services believed there was room for no “A more powerful app” of clawback instructions.

Rio has since strengthened its compensation policy to make it easier to cancel bonuses. But even as more companies have adopted malus and clawback provisions, there is still significant debate about how to make sure they go far enough.

In last year’s corporate governance consultation, the government proposed introducing a system of mandatory minimum divestment conditions for the highest-profile public companies. This list included not only material misrepresentation of results or even inappropriate behavior, but “behavior leading to financial loss” and “unreasonable failure to protect the interests of employees and customers”, instructions that would have significantly expanded the discretion of the board of directors. Opponents argued that an overly prescriptive approach could make taking action against directors more difficult rather than easier.

There is an argument that escape and clawback instructions function best as a threat. But threats only work when they are credible.

It could be that the compensation policy and the executive contracts were drafted in such a way that it is too difficult to use them, and this has only now been corrected in the latest rounds of revisions. It’s equally plausible that outlaws tend to want a shot of a bad boss and that means hijacking a friendly pack so they don’t find out where the bodies are buried later. When it’s just about hard financial performance, such an approach makes sense.

However, until directors start regularly punishing bad bosses, the threat of malus and clawback clauses remains about as solid as Carillion.

cat.rutterpooley@ft.com
@catrutterpooley

Why are we still not punishing bosses for failure? Source link Why are we still not punishing bosses for failure?

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