Little used in India, clawback provisions have seen greater traction abroad

ICICI Bank's own compensation policy suggests clawback in the event of 'gross negligence or integrity breach'

A number of companies from the United States of America to Denmark; have all seen attempts at clawback of executive compensation following scandal.

Insurer UnitedHealth Group’s chief executive officer and chairman William W. McGuire had to face clawback provisions which resulted in loss of compensation worth over $600 million in 2007. This followed an investigation into backdating of options.

A September 2018 report on Denmark’s largest bank Danske Bank talked of a clawback in compensation for chief executive officer Thomas Borgen. The bank is alleged to have helped launder around $235 billion.

Canada-based Valeant Pharmaceuticals International has had to battle former chief financial officer Howard Schiller over the return of compensation of $26.1 million in compensation. There was a scandal after allegations of accounting fraud at the company.

In the case of US-based financial services firm Wells Fargo, chairman and chief executive John Stumpf had to return over $60 million in compensation. The bank had been involved in a scandal where staff is said to have opened fraudulent accounts in the names of customers.

Top executives at the bank JP Morgan Chase returned over $100 million. This was following a rogue trader cost the company $6 billion.

ICICI Bank head Chanda Kochhar was accused of favouring the Videocon group which had business relations with her spouse. An independent enquiry found that she was guilty of conflict of interest. This decision reversed an earlier move.  J.N. Gupta, co-founder and managing director of corporate governance advisory Stakeholder Empowerment Services (SES) said that the change in the position of the board against Kochhar could also come into question. It had earlier given Kochhar a clean chit.

"One cannot absolve the...board," he said.

Meanwhile, the Reserve Bank of India’s own guidelines have talked about clawback provisions.

“A clawback….is a contractual agreement between the employee and the bank in which the employee agrees to return previously paid or vested remuneration to the bank under certain circumstances. Banks may put in place appropriate modalities to incorporate....clawback mechanism in respect of variable pay, taking into account relevant statutory and regulatory stipulations as applicable,” according to the bank’s compensation guidelines of 2012.

ICICI Bank too has provisions for clawback, according to a copy of its 2018 compensation policy available on its website.

“Employees will be required to sign clawback agreements for the variable pay. In a clawback arrangement, the employee will agree to return, in case asked for, the previously paid variable pay to the Bank in the event of an enquiry determining gross negligence or integrity breach, taking into account relevant regulatory stipulations,” it said.

Amit Tandon, founder and managing director of Institutional Investor Advisory Services India (IiAS) said that there is limited precedent in India on enforcing clawback provisions. The modalities of such an action will be closely watched.

Shriram Subramanian, founder and managing director of proxy advisor InGovern Research Services, said that companies will likely make sure that agreements with professional chief executives are likely to become more watertight. People will want to make it easier to enforce such clawback if it is required, according to him.  The current case will be closely watched for the precedent it sets, according to Shriram.

“If she contests it then these people will have to fight it in the court,” he said.

"The general prevalence in India is to restrict the exercise of options during the time period where the enquiry for such  ‘cause’ is taking place and in cases where the employee is adjudged guilty of ‘cause’ both the vested and unvested options lapse. The treatment of the shares resulting from the exercise of the options as well as any cash payed out due to equity linked compensation plans can be clawed back along with a penalty if the provisions for the same exist in the...(compensation plan)...document," said Gaurav Chaubey, Director at consulting firm Grant Thornton Advisory.

What is RBI’s clawback provision

A clawback is a contractual agreement between the employee and the bank in which the employee agrees to return previously paid or vested remuneration to the bank under certain circumstances. Banks may put in place appropriate modalities to incorporate the clawback mechanism in respect of variable pay, taking into account relevant statutory and regulatory stipulations as applicable.