View source for Finance:Clawback

{{Corporate finance}}
The term '''clawback''' or '''claw back''' refers to any money or benefits that have been given out, but are required to be returned (clawed back) due to special circumstances or events, such as the monies having been received as the result of a financial crime, or where there is a clawback provision in the executive compensation contract.<ref>{{cite web|url=http://www.investopedia.com/terms/c/clawback.asp|title= Clawback | website=Investopedia}}</ref><ref>[https://www.merriam-webster.com/dictionary/claw%20back Claw Back | Definition of Claw Back by Merriam-Webster<!-- Bot generated title -->]</ref>

In law, clawback is most commonly known as restitution.

==From government grantees==
In the past, clawback phenomena have been used primarily in securing [[Finance:Tax incentive|tax incentive]]s, abatements, [[Finance:Tax refund|tax refund]]s, and grants. Clawbacks are distinguished from repayments or refunds as they involve a penalty, in addition to a repayment.

The use of tax incentives for attracting jobs and capital investment has grown over the past decades to include performance measures from which to gauge a company's growth. Typical measures are:

#number of created jobs over 5
#annual payroll;
#amount of capital investment 
#amount of depreciated value .

More unusual measures are retaining a headquarters at a specific site for a period of time, amount of production increase or production cost decrease per unit, or the requirement to bring a given technology to a commercial market. The recipient will be required to return the monetary value of the incentive plus a penalty and/or interest to the grantor of the incentive, usually a local or state taxing authority. As the use of incentives mature over time, it is sometimes alleged {{who|date=May 2020}} that the triggering of clawbacks for non-performance will likely become more ubiquitous.

Clawbacks can be understood to be the contractual elements that stand between the drive for economic development and community development and the slippery slope of [[Finance:Corporate welfare|corporate welfare]]. They are highly controversial and are utilized as community-based guarantees for some expectation of performance. The site location industry normally tries to eliminate or reduce any such promises as part of their negotiations.<ref>{{cite web|website=Business Facilities|url=http://www.businessfacilities.com/bf_03_04_cover5.asp|title=Cover|access-date=2006-09-13|archive-url=https://web.archive.org/web/20061113130202/http://www.businessfacilities.com/bf_03_04_cover5.asp|archive-date=2006-11-13|url-status=dead}}</ref><ref name="goodjobsfirst.org">{{cite web|website=Good Jobs First|url=http://www.goodjobsfirst.org/accountable_development/reform2.cfm|title=Reform|access-date=2006-09-13|archive-url=https://web.archive.org/web/20060823152332/http://www.goodjobsfirst.org/accountable_development/reform2.cfm|archive-date=2006-08-23}}</ref><ref>{{cite web|url=https://www.iedconline.org/ |website=International Economic Development Council|title=Home page}}</ref>

==From employees==

===Clawback provision===
A ''clawback provision'' is a contractual clause typically included in employment contracts by financial firms, by which money already paid to an employee must be paid back to the employer under certain conditions.

The employees' bonuses are, in a clawback scheme, tied specifically to the performance (or lack thereof) of the financial product(s) the individual(s) may have created and/or sold as part of his or her job expecting a high profit. If the product does indeed do well over a long period of time, and permanently improves the nature of the firm, the bonuses paid to the individual are allowed to be retained by the individual. However, if the product fails, and damages the nature of the firm—even years down the line from the product's inception—then the firm has the right to revoke, reclaim, or otherwise repossess some or all of the bonus amount(s).<ref name="newyorker.com">{{cite news|date=November 29, 2010|title=What Good Is Wall Street? Much of what investment bankers do is socially worthless|author=Cassidy, John |url=http://www.newyorker.com/reporting/2010/11/29/101129fa_fact_cassidy}}</ref> However, research shows managers who are subject to clawback provisions that are newly in place in a company often try to offset their increased risk of bonus clawback by demanding an increase in base salary that is not subject to being clawed back.<ref name="deHaan et al."/>

The prevalence of clawback provisions among Fortune 100 companies increased from lower than 3% prior to 2005, to 82% in 2010.<ref name="CSuite">{{cite web|url=http://www.c-suiteinsight.com/index.php/2011/02/focus-on-clawbacks/|title=Focus on Clawbacks|website=C-Suite Insight|date=2011|access-date=2012-05-16|archive-url=https://archive.today/20130118164533/http://www.c-suiteinsight.com/index.php/2011/02/focus-on-clawbacks/|archive-date=2013-01-18|url-status=dead}}</ref> The growing popularity of clawback provisions is likely, at least in part, due to the Sarbanes–Oxley Act of 2002, which requires the U.S. Securities and Exchange Commission (SEC) to pursue the repayment of incentive compensation from senior executives who are involved in a fraud. In practice, the Securities and Exchange Commission has enforced its clawback powers in only a small number of cases.<ref name="Fried and Shilon">{{cite journal|ssrn=1798185 |title=Excess-Pay Clawbacks|author1= Fried, Jesse |author2= Shilon, Nitzan |date=2011|journal= Journal of Corporation Law|volume= 36}}</ref>

The Dodd–Frank Act of 2010 mandates that the SEC require that U.S. public companies include a clawback provision in their executive compensation contracts that is triggered by any accounting restatement, regardless of fault (whereas the clawback provisions per the Sarbanes–Oxley Act only applied to intentional fraud). As of mid-2015, this portion of the Dodd–Frank Act had yet to be implemented.<ref name=SEC>{{cite web|url=https://www.sec.gov/rules/proposed/2015/33-9861.pdf |title=Listing Standards for Recovery of Erroneously Awarded Compensation|access-date=February 10, 2018|website=SEC.gov}}</ref>

===Faithless servant clawback===
Under the [[Social:Faithless servant|faithless servant]] doctrine, an employee who commits a crime in his work or fails to follow the company code of conduct or code of ethics is subject to having all of his compensation clawed back by the employer. In ''[[Biography:Chip Skowron|Morgan Stanley v. Skowron]]'', 989 F. Supp. 2d 356 (S.D.N.Y. 2013), applying New York's faithless servant doctrine, the court held that a hedge fund's portfolio manager engaging in insider trading in violation of his company's code of conduct, which also required him to report his misconduct, must repay his employer the full $31 million his employer paid him as compensation during his period of faithlessness.<ref name="auto6">{{Cite book|url=https://books.google.com/books?id=3RaGDwAAQBAJ&dq=%22faithless+servant%22&pg=PA472|title=Employment Law: Private Ordering and Its Limitations|first1=Timothy P.|last1=Glynn|first2=Rachel S.|last2=Arnow-Richman|first3=Charles A.|last3=Sullivan|date= 2019|publisher=Wolters Kluwer Law & Business|isbn=9781543801064|via=Google Books}}</ref><ref name="auto4">{{cite web|url=https://www.ibtimes.co.uk/faithless-ex-morgan-stanley-fund-manager-ordered-repay-31m-former-employer-1429819|author=Jerin Matthew|title='Faithless' Ex-Morgan Stanley Fund Manager Ordered to Repay $31m to Former Employer|date=December 20, 2013|website=International Business Times UK}}</ref><ref>{{cite web|url=https://dealbook.nytimes.com/2013/12/23/the-huge-costs-of-being-a-faithless-servant/|title=The Huge Costs of Being a 'Faithless Servant'|first=Peter J.|last=Henning|date=December 23, 2013|website=New York Times DealBook}}</ref><ref>{{cite web|url=https://www.greenwichtime.com/news/article/Morgan-Stanley-seeks-10-2-million-from-convicted-4193127.php|title=Morgan Stanley seeks $10.2 million from convicted former trader|date=January 15, 2013|work=GreenwichTime}}</ref> The court called the insider trading the "ultimate abuse of a portfolio manager's position."<ref name="auto4"/> The judge also wrote: "In addition to exposing Morgan Stanley to government investigations and direct financial losses, Skowron's behavior damaged the firm's reputation, a valuable corporate asset."<ref name="auto4"/>

===Implications===
The usual objective of a clawback provision is to deter managers from publishing incorrect accounting information. Academic research finds that voluntarily adopted clawback provisions appear to be effective at reducing both intentional and unintentional accounting errors.<ref name="deHaan et al.">{{cite news|ssrn=2049442 |title=Does Voluntary Adoption of a Clawback Provision Improve Financial Reporting Quality?|author1= deHaan, Ed |author2= Hodge, Frank |author3= Shevlin, Terry J. |date=2012|work=Contemporary Accounting Research, forthcoming}}</ref> The same study also finds that investors have greater confidence in a firm's financial statements after clawback adoption, and that boards of directors place greater weight on accounting numbers in executive bonuses after a clawback is in place (''i.e.'', pay for performance sensitivity increases).

According to a December 2010 ''New Yorker'' magazine article,<ref name="newyorker.com"/> the clawback phenomenon pursued by banks and other financial groups directly and/or indirectly responsible for the financial crisis has been used by the chief administrators of those institutions in order to make the case that they are taking tangible self-corrective action to both prevent another crisis (by supposedly dis-incentivizing the sorts of shady investment-product behavior displayed by their people in the past) and to appropriately punish any potential future activity of a similar sort. However, some professional economists have argued that it is unlikely that either result will become the case, and that employee clawbacks are better seen as a [[Social:Public relations|public relations]] tactic until the impact of the financial crisis fades and similar abuses of the financial system can resume, with minimal or no detection by outside forces.<ref name="newyorker.com"/>

=== Notable cases ===
In the United States, clawbacks were rarely used until 2006.<ref name="Goldstein">{{Cite web|url=https://www.marketwatch.com/story/only-two-execs-have-had-more-money-clawed-back-than-wells-fargos-stumpf-and-tolstedt-2017-04-11|title=Only two execs have had more money clawed back than Wells Fargo's Stumpf and Tolstedt|last=Goldstein|first=Steve|website=MarketWatch|language=en-US|access-date=2020-03-15}}</ref> Major cases included a $600 million clawback affecting William W. McGuire of [[Company:UnitedHealth Group|UnitedHealth Group]], $500 million affecting Dennis Kozlowski of [[Company:Tyco International|Tyco]], and in 2019 clawbacks of compensation for the former CEO of Wells Fargo John Stumpf as well as a colleague.<ref name="Goldstein"/>

==From investors==
Clawback lawsuits in US courts, especially from innocent individuals and entities who profited from financial crimes of others, have increased in the years since 2000.<ref name="autogenerated2">Sepinwall, A. (2012). [https://repository.upenn.edu/cgi/viewcontent.cgi?article=1000&context=lgst_papers "Righting Others' Wrongs: A Critical Look at Clawbacks in Madoff-Type Ponzi Schemes and Other Frauds,"] ''Brooklyn Law Review'', 78 (1), 1-64.</ref>

The yearslong clawback undertaken after the Madoff investment scandal, which attempted to transfer money back from the financial winners to the financial losers among those who had invested in [[Biography:Bernie Madoff|Bernie Madoff]]'s Ponzi scheme, is notable both for the size and success of the operation. A team of lawyers headed by Irving Picard were able to recover over $13 billion, or about 75%, of the estimated $19 billion collectively lost by investors, and transfer it back to those investors who had claimed losses.<ref name="autogenerated2" /><ref>[https://www.wsj.com/articles/the-amazing-madoff-clawback-1543620951 "The Amazing Madoff Clawback; How two lawyers, Irving Picard and David Sheehan, have recovered 75 cents on the dollar of the stolen money—many times the usual rate in such cases,"] ''The Wall Street Journal'', November 30, 2018.</ref><ref name="autogenerateda">[https://www.bloomberg.com/graphics/2018-recovering-madoff-money/ "Madoff's Victims Are Close to Getting Their $19 Billion Back,"<!-- Bot generated title -->] Bloomberg.</ref> This was a far higher percentage than the usual recovery rate for investor clawbacks, which typically ranges from 5 to 30 percent.<ref name="autogenerateda" /> Of the recovered money, $7.2 billion came from the estate of just one investor, Jeffry Picower; it was the largest civil forfeiture payment in U.S. history.<ref name="autogenerateda" /><ref>[https://www.thedailybeast.com/dollar72-billion-picower-settlement-payday-for-madoff-victims "$7.2 Billion Picower Settlement: Payday for Madoff Victims,"<!-- Bot generated title -->] ''The Daily Beast''.</ref>

==Other clawback types==
Clawback provisions are also used in [[Finance:Bankruptcy|bankruptcy]] matters where insiders may have raided assets prior to a filing,.<ref>{{cite web|url=http://www.abajournal.com/news/article/clawback_suit_seeks_420k_from_us_transportation_secretary|title=Clawback suit seeks $420K from US transportation secretary concerning in-house counsel pay|website=American Bar Association}}</ref> The aim of the clause is to secure an option for an employer or trustee to limit bonuses, compensation, or other remuneration in case of catastrophic shifts in business, bankruptcy, and national crisis such as the [[Finance:Financial crisis of 2007–2008|financial crisis of 2007–2008]].

==In various countries==
Italy and the Netherlands have several clawback regimes, and there are two clawback regimes in the {{wipe|United Kingdom}}.<ref name=autogenerated1>{{Cite web |url=https://communications.freshfields.com/files/uploads/documents/marcus%20s/Clawback.pdf |title=Clawback; A global guide |access-date=2019-07-21 |archive-date=2019-07-21 |archive-url=https://web.archive.org/web/20190721201711/https://communications.freshfields.com/files/uploads/documents/marcus%2520s/Clawback.pdf |url-status=dead }}</ref>  The French clawback regime is limited.<ref name=autogenerated1 /> In Belgium, their enforceability is unclear.<ref name=autogenerated1 />

==References==
<references/>

[[Category:Corporate finance]]
[[Category:Financial regulation]]
[[Category:Public economics]]

{{Sourceattribution|Clawback}}