The U.S. Department of Justice (DOJ) announced Friday a three-year pilot program related to its continued efforts to hold individuals directly accountable for corporate wrongdoing. The two-pronged program incentivizes compliance-oriented compensation by businesses and the use of clawbacks.
First, the DOJ directs companies to implement robust, compliance-related criteria tied to their executive compensation and bonus systems. The implementation of a compensation and bonus system with embedded compliance criteria is aimed at rewarding positive behavior, deterring misconduct and encouraging proactive managerial oversight. As implemented, individuals who fail in their compliance responsibilities would not receive a bonus and/or would be subject to disciplinary measures as delineated in the company’s compliance policies.
Second, the program incentivizes companies to pursue clawing back any already distributed compensation from alleged wrongdoers by offering fine reductions to the company. To the extent that a company is successful in its clawback efforts, the DOJ will permit the company to retain the recovered funds and not repay the designated clawback credit. If, despite best efforts, the company is unsuccessful in its recoupment efforts, the DOJ will allow a fine reduction commensurate to the time, money and effort invested in the exercise.
Despite the DOJ’s guidance memorandum, there remains some uncertainty regarding the application of the program’s requirements. The DOJ retains significant discretion in enforcement. For example, the fine reduction for unsuccessful clawback efforts may not exceed 25% and is subject to prosecutorial discretion regarding whether “good faith” recoupment efforts were made.
Additionally, and importantly, it is unclear exactly which employees fall within the scope of the program and may be held responsible for compliance failures. While the individual wrongdoer is certainly subject to its terms, it is unclear the extent to which compliance personnel, those with supervisory authority and employees who knew of – or were considered “willfully blind” to – the compliance failures will be scrutinized or held liable.
Despite these uncertainties in the program, one thing is clear: the DOJ remains focused on individual accountability and demands corporate investment in compliance. Now, the DOJ has escalated its efforts to shift the burden of malfeasance onto responsible individuals and away from innocent shareholders. Consideration should be given to creating compensation structures that align executives’ financial interest with the company’s compliance priorities.
Miles & Stockbridge’s White Collar Group will be monitoring the pilot program.
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