While there will be many unsavory details of 2016 to go through — the thing most Americans can agree with is that at least the word “clawback” was added to our collective vocabulary.
But this morning at least two Americans are likely not participating in the celebration of the term: Wells Fargo CEO John Stumpf and erstwhile head of community banking Carrie Toldstead, since Wells Fargo’s board has decided to invoke its clawback provision for executive pay and reclaim a collective $60 million from the pair.
Stumpf will forfeit $41 million for the bank’s burgeoning sales scandal, Tolsteadt will loose $19 million in unvested awards.
The decision to rescind pay in connection to the account creation scandal that has been rocking Wells Fargo for the last several weeks actually began before Stumpf’s public excoriation from the Senate banking committee last week. Clawbacks — or the lack thereof — were a favored topic among senators at last weeks hearing, as Stumpf heard complains from senator after senator on the panel that Wells had fired 5,300 lower level employees in connection with the scandal, while making no (as of that time) moves against the executives who created the toxic environment where fraud was allowed (and some say encouraged) to flourish.
“The board should have already acted to claw back those salaries,” Sen. Heidi Heitkamp (D., N.D.) said at the hearing. “If you had come here and said, the board now is clawing back, these are the things that we’re doing…you would be in a lot better position sitting in that chair right now.”
The bank said that the $41 million is from Mr. Stumpf’s unvested equity awards. Stumpf will also forgo salary during an independent investigation the board is leading and has recused himself from that investigation. Neither he nor Ms. Tolstedt will receive a bonus for 2016.
The bank’s lead independent director, Stephen Sanger, also noted that further action may be warranted in the board’s statement on the clawbacks.
“[The independent directors] will take such other actions as they collectively deem appropriate, which may include further compensation actions before any additional equity awards vest or bonus decisions are made early next year, clawbacks of compensation already paid out, and other employment-related actions.”
That further investigation will make a determination about Ms. Tolstedt’s roughly $35 million in unvested options, according to a person familiar with the matter.
Stumpf’s shockingly large clawback is — like many other things associated with this story — the largest of its kind. The last big bank CEO to come to such a sharp public rebuke from his board was Jamie Dimon, who had his 2011 salary slashed from $23.1 million to $11.5 million due to the London Whale trading scandal.
But J.P. Morgan didn’t formally claw back compensation on Dimon. Three traders and other executives involved with the London Whale mess did see maximum pay clawbacks — Ina Drew, the former bank executive who oversaw the unit at the heart of the scandal, volunteered to return pay in line with the maximum clawback.
Otherwise, there have only been sporadic instances of attempts to recover pay on Wall Street, usually involving lower-level employees.
Congressman Jeb Hensarling (R., Texas), chairman of the House Financial Services Committee, told reporters that pay and clawbacks will be central to Stumpf’s next trip to the hill to answer questions.
“If I was a shareholder, I’d be outraged if there weren’t clawbacks,” Mr. Hensarling said. He promised to use his hearing and a committee investigation to find out how a “fraud of this massive scale took place” at the lender.
“Tonight’s announcement is a step in the right direction but there are still dozens of unanswered questions,” said Sen. Sherrod Brown (D., Ohio), the top Democrat on the Senate Banking Committee noted in a rare moment of bi-partisan agreement in an election year.
Wells Fargo’s board has retained the services of Shearman & Sterling LLP to advise it on whether and how it should claw back pay from top executives. The law firm is also leading an independent investigation for the board.
The Wells Fargo sales practices scandal has already rekindled debate about clawbacks and new regulatory requirements around them. Among those new regulatory changes would be a provision that would require clawbacks from big bank executives whose misconduct results in significant financial or reputational harm or any fraud. Those proposed rules would require banks to take back pay for wrongdoing for at least seven years after the executive receives the payment.
We are sure the use of the word “significant” will not cause any confusion or expensive lawsuits.
Bankers have resisted the proposals, saying they have already tightened compensation standards and adopted voluntary clawback policies.
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