Business Irish

Tuesday 12 December 2017

Emmet Oliver: Time for 'clawbacks' on bank bonuses and pay

Former BoI chief executive Brian Goggin 'only' got €2m, down from €4m in his last year at the bank
Former BoI chief executive Brian Goggin 'only' got €2m, down from €4m in his last year at the bank
Former INBS chief Michael Fingleton
Former Anglo Irish Bank chief David Drumm walked off with €3.2m in 2007

Emmet Oliver

How is it that every time fresh loan losses are announced by one of the major banks, the previous figure is revised upward, not downward? We can all finally call the end of the financial crisis when one of the major lenders announces that it revising down its previous estimates for impairments on its loan book, rather than up. But don't hold your breath.

The poor lending decisions made by banks under the control of Michael Fingleton, David Drumm, Eugene Sheehy and Brian Goggin continue to reverberate throughout the economy.

The final capital calls for Anglo Irish and Irish Nationwide continue to grow, and NAMA continues to find that loan assets are in worse condition than originally anticipated, increasing the exposure for Irish taxpayers and businesses.

The terrifying scale of the losses cannot be changed, but what about so-called "burden sharing''?

Shouldn't the burden of the losses, especially on the scale achieved by the Irish banks, be shared among several different parties, not least the executives in charge of the institutions at the time when the loans were originated? Apparently not.

Irish banks (and most listed Irish companies) have absolutely no provision for clawing back bonuses, share options, pension entitlements or general pay regardless of how businesses perform in the period after the awards are made.

This aversion to clawback arrangement is based on the rather quaint, but outmoded idea, that shareholders should police the awards at the time they are being made and its tough luck if things don't turn out the way they thought subsequently.

But change is afoot, and as usual with corporate governance concerns, the fresh ideas are coming from the United States. Both Obama's new financial reform act and the original TARP legislation for banks contained provisions for clawing back executive remuneration based on the performance of firms subsequently.

So far, Ireland has remained deaf to these ideas, although the government's own report on banking remuneration (the CIROC report) did briefly float the idea of clawing back compensation on foot of subsequent "illusory performance''.

Somewhat surprisingly, one of the few trailblazers in this area has been Irish industrial holdings company, DCC, which is currently toying with the idea of a "general provision for subsequent clawback of bonus, in certain circumstances''.

Enda Kenny has also called for such a regime, but of course the key problem here is it couldn't be retrospective. So forget about the awards made to Michael Fingleton or David Drumm coming into the financial crisis.

For example, Mr Fingleton was paid €2.3m for 2007, made up of €812,000 basic pay and a €1.4m bonus, plus other benefits. Mr Drumm was paid a total of €3.2m, made up of €956,000 basic pay and a bonus of €2m, plus other benefits.

Of course clawing back such payments (or more accurately future payments) couldn't solely occur because a company had a bad year or two after they were awarded.

A reasonably fair and non-draconian system would have to be devised.

Otherwise, the chances of getting anyone half decent to work at the top of an Irish bank would be slim.

For example, the TARP legislation talked about imposing a clawback for any bonus based on "materially inaccurate performance criteria''.

The Obama act is simpler; any bank or listed company that has to restate its financials in any subsequent year must recover compensation (including share options) from executives paid out in the three previous years.

The precise details are to be worked out by the SEC. The clawback provisions of the act apply to all former executive officers of the company, not just its current executive team.

Crucially, the act doesn't require that an executive has to have committed some act of "wrongdoing'' -simply that the executive was at the top of the company when "erroneous financial data'' was produced.

In the Irish case, the CIROC phrase "illusory performance'' is probably more relevant. Despite overlapping investigations by multiple agencies, no senior bank executive (including some of those mentioned above) have been accused of any wrongdoing.

The debate is more about the performance of the companies they led, rather than legal wrongdoing.

While battle hardened (or is that battle weary) finance minister Brian Lenihan has already got a huge reform agenda on his plate, reforming executive compensation at banks, including those nasty little clawback arrangements, is definitely worth looking at.

Irish Independent

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