Demanding Transparency in Clawbacks

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Friday June 7, 2013 at 9:24 am
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Editor’s Note: This post comes to us from Elizabeth McGeveran, a consultant on corporate governance matters, member of the External Citizens Advisory Panel at ExxonMobil, and former Senior Vice President for Governance & Sustainable Investment at F&C Asset Management, one of the co-filers of Shareholder Proposal No. 8 in Walmart’s 2013 Proxy Statement.

After the horrifying collapse of a factory in Bangladesh killed over 1,100 workers, companies like H&M are moving to strengthen supplier standards and audits, as they should. We have seen similar responses to other compliance meltdowns in the past. Banks trumpet new checks and balances to help prevent excessive risk taking, massive trading losses and robo-foreclosures. Walmart points to changes in its compliance policies in response to front-page allegations of bribery and corruption in Mexico. Companies are quite happy to tell investors, employees, and the public how such changes will prevent the same problems from recurring.

This public disclosure about change for the future is commendable. But such reforms must be accompanied by measures to hold executives accountable for major compliance failures in the past. And here, beyond the occasional news report that a CEO volunteered to forego a bonus, companies tell us very little.

Walmart’s annual meeting on June 7, 2013 provided an opportunity for investors to plant the flag in favor of enhanced disclosure about accountability in executive compensation. Simply put, investors asked for information about whether Walmart is actually using its clawback provisions. The filers of Proposal No. 8 weren’t looking to name and shame individual executives, but want the company to provide information when clawbacks are deployed. One way to achieve this would be to report annually how many times it used clawbacks at the leadership level and total amounts reclaimed. (Both major proxy voting advisory firms, ISS and Glass Lewis, recommended that shareholders vote for this sensible proposal.)

Walmart has had constructive language in its policies and contracts that permit cancelling shares and clawing back compensation. But it does not practice any attendant disclosure – which means that investors have no idea to what degree this is a pretty paper policy and to what degree it is a living, breathing practice.

More important, the company is missing a powerful opportunity to enhance its culture of accountability. Walmart is clear that any employee can be dismissed for violating the ethics code. But will rank-and-file workers know that executive bonuses based on impressive growth in Mexico were recouped if that growth is linked to bribery? Aggregate information about clawbacks underscores to the entire Walmart family that a company’s corporate managers are held to the highest standards – and reassures investors that compliance failures never lead to reward. Given that compliance failures cost shareholders, it is only fair that they cost company leadership as well.

Walmart wouldn’t be the first multinational to take this step. Companies such as HSBC and Lloyds Banking Group have provided such disclosure, and the US’s Capital One introduced a policy including disclosure in 2013. So it can be done. The question is, will investors demand that it be done?

  1. BREAKING NEWS: On June 10, Walmart released the vote results from its annual meeting. The powerful vote in favor of the claw back transparency proposal (Number 8 described above) sends a strong message to the company’s Board and executives. A substantial number of independent shareholders want more information about clawbacks.

    Getting an accurate view of the vote totals at Walmart requires a few extra dance steps. The Walton family and other Walmart insiders own over 50% of the shares so half of any vote is automatically pro-management. However, when you take the insiders out of the totals, 32% of the independent shareholder votes were firmly in favor for greater transparency and accountability in clawbacks.

    Walmart’s greatest retail success come from listening closely to their customers. Were 32% of Walmart customers to ask for a new product or more information Walmart would act quickly to meet customer demand. Let’s see if they are as quick to meet the demands of their independent shareholders.

    Comment by Elizabeth McGeveran — June 10, 2013 @ 1:14 pm


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