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In case of scandal, Emerson and Mallinckrodt strengthen clawback rules

In case of scandal, Emerson and Mallinckrodt strengthen clawback rules

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Wells Fargo CEO faces lawmakers, apologizes again

In this Tuesday, Sept. 20, 2016, file photo, Wells Fargo CEO John Stumpf arrives to testify before the Senate Banking Committee, on Capitol Hill in Washington. Stumpf, newly stripped of tens of millions of dollars in compensation in a scandal over sales practices, is scheduled to appear before the House Financial Services Committee on Thursday, Sept. 29. (AP Photo/Susan Walsh, File)

If executives are paid handsomely for building up a company’s value, they should be punished for damaging the brand.

That’s the principle behind policies that require bonuses and other incentive pay to be repaid under certain circumstances. Such clawback policies historically have been narrowly written, requiring repayment only if a company was forced to restate its earnings.

In recent years, financial scandals and the #MeToo movement have led companies to think more broadly about what kind of conduct should require a financial penalty.

Mallinckrodt, the drug company that was based in Hazelwood until recently, expanded its clawback policy last year to cover “misconduct resulting in a material violation of the company’s policies that results in significant harm to the company.” Mallinckrodt said it made the change after “a productive engagement between members of the board and certain shareholders.”

Emerson, the Ferguson-based industrial company, made a similar change this year, allowing clawbacks in response to any “violations of the company’s ethics and compliance programs and policies.”

All public companies were required to adopt clawback policies after passage of the Sarbanes-Oxley Act in 2002, but that law only applied when executive misconduct caused a company’s earnings to be restated. The Dodd-Frank Act of 2010 requires clawbacks for any restatement, regardless of the cause.

Chris Brindisi, a principal at consulting firm Pay Governance, says recent company policies go beyond the Dodd-Frank requirements, which haven’t been fully implemented. The #MeToo movement and Wells Fargo’s fake accounts scandal made boards realize that executive misbehavior can harm a company even when it doesn’t lead to a restatement.

“It now gives the board a way to say the executive did something that damages the reputation of the company and puts it at financial risk,” Brindisi said. “The reasoning is that had we known (about such conduct), we would have fired him or her, so we are going to take back the past years of incentive compensation.”

The broadened clawback policies started in the financial sector, Brindisi said, where bank regulators saw them as a way of reducing risk. In the wake of the fake accounts scandal, Wells Fargo clawed back $69 million from former chief executive John Stumpf and $67 million from consumer banking executive Carrie Tolstedt.

Emerson and Mallinckrodt have yet to disclose any clawbacks under their new policies.

{h1}Here’s what St. Louis CEOs earned in 2018:


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