Last week something unusual happened. A chief executive who presided over a UK corporate failure received a financial punishment.
The case in question was particularly egregious: the collapse of construction company Carillion in 2018 with £7bn in liabilities and £29mn in cash. The 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 they are still subject to appeal by the executives involved. But even where it is boards and investors holding executives to account for performance shortcomings, the evidence suggests that directors are not receiving much in the way of penalties.
The normal mechanism for a board to punish an executive — other than simply firing them — is through the use of so-called malus and clawback provisions linked to bonus entitlements. To sum these up simply, malus rules allow a company to withhold a bonus yet to be paid; clawback to recover one already disbursed. While these provisions started life in the financial services sector after the banking crisis, they are now a standard feature at almost all large companies.
The problem is that it is not clear that they work.
There are a number of examples of similar provisions being used in the US. Wells Fargo recovered tens of millions of dollars from two executives over a sham accounts scandal in 2016. Last year, ousted McDonald’s boss Steve Easterbrook forfeited $105mn after he “failed . . . to uphold McDonald’s values” (he was alleged to have had multiple sexual relationships with employees and then lied about it to the board). But there are very few in the UK.
Awards tend to be suspended during regulatory and other investigations. Barclays suspended £22mn of share awards to former chief executive Jes Staley earlier this year while City watchdogs probe Staley’s characterisation of his relationship with paedophile Jeffrey Epstein.
But they are still often eventually paid out. Last week Lloyds Banking Group decided not to adjust awards to former boss António Horta-Osório over his handling of compensation for the HBOS Reading scandal, after the bank took a further provision last financial year (Horta-Osório had waived an initial award in 2019 when a review first found shortcomings in the compensation process).
There are two high-profile occasions where boards have used the powers in recent years.
Last year, advertising company WPP said it would use malus adjustments to withdraw share awards due to former chief executive Sir Martin Sorrell, arguing he had leaked client information. Sorrell said at the time that he would contest that decision. And in 2020, mining group Rio Tinto cut the bonus of then-boss Jean-Sébastien Jacques after the company blew up a 46,000-year-old Aboriginal site.
In Rio’s case, the problem was that the removal of a £2.7mn bonus somewhat paled in comparison with the £27mn one proxy adviser estimated the chief executive still held in performance shares. Institutional Shareholder Services reckoned there was a case for a “more robust application” of clawback provisions.
Rio has since strengthened its remuneration policy to make clawing back bonuses easier. 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 its corporate governance consultation last year, the government proposed introducing a set of mandatory minimum clawback conditions for the highest-profile public companies. That list included not just the traditional material misstatement of results or even gross misconduct, but “conduct leading to financial loss” and “unreasonable failure to protect the interests of employees and customers”, provisions that would have significantly expanded boards’ discretion. Opponents argued that an overly prescriptive approach may make it harder to take action against directors rather than easier.
There is an argument that malus and clawback provisions function best as a threat. But threats only work when they are credible.
It could be that remuneration policies and executives’ contracts have been drafted such that it is too difficult to make use of them, and that is only just being rectified in the latest rounds of revisions. Just as plausible is that boards tend to want shot of a bad boss and that means striking a friendly package so they do not disclose where the bodies are buried later on. Where it is just a case of underwhelming financial performance, such an approach makes sense.
Yet until boards start to regularly punish bad bosses, the threat from malus and clawback clauses remains about as solid as Carillion.