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Clawing back clawbacks

19 December 2011 By Reynolds Holding

Directors and officers insurance may be declawing clawbacks. Allowing regulators to recoup bosses’ undeserved rewards is central to U.S. financial reforms. But in addition to more standard risks, D&O polices are now covering salaries and bonuses lost in this way – at shareholder expense. Insurers deny helping executives skirt accountability. Investors, watchdogs and the courts may see things differently.

Wrist-slap fines for errant corporations haven’t satisfied the public’s lust for rolling heads. That’s one reason the Dodd-Frank and Sarbanes-Oxley laws provide for clawbacks. The idea is that at least part of senior executives’ chunky pay packages can be recovered if they run banks that fail or receive remuneration based on bad numbers. That bites them where it really hurts, in the pocketbook.

Turns out, clawbacks also created a business opportunity. Insurers began offering policies to cover them in April, even before regulators issued the first applicable rules under Dodd-Frank. Dozens of companies, banks, hedge funds and private equity firms have snatched policies covering clawbacks worth millions of dollars for annual premiums that run to a few tens of thousands.

Marsh and other insurance brokers say the policies don’t undermine financial reforms because they don’t cover fraud or intentional wrongdoing. The insurers also argue that clawbacks were designed to recoup money for shareholders and the public rather than to punish officers and directors.

Regulators, not to mention corporate honchos, might be surprised to hear that. In any event, the legal basis for clawbacks is the return of money people never should have received. A bonus based, say, on phony financial results surely fits that bill. And courts have ruled that insurance covering similar kinds of improper payments isn’t enforceable. But if insurers want to pay, there’s nothing to stop them. Most have agreed generally not to challenge reimbursement.

That leaves the regulators. The Securities and Exchange Commission and the Federal Deposit Insurance Corp haven’t yet prohibited their charges from buying clawback coverage. At a minimum, there’s precedent for including in legal settlements a ban on any such insurance reimbursement. Not being insured against clawbacks shouldn’t deter talented executives, as critics claim it might. If they don’t run companies into the ground, they don’t have to fear for their millions.

 

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