Friday, August 28, 2009
Miriam Cherry (McGeorge/Georgia) and Jarrod Wong (McGeorge) have posted on SSRN their forthcoming work in the Minnesota Law Review: Clawbacks: Prospective Contract Measures in an Era of Excessive Executive Compensation and Ponzi Schemes.
From the abstract:
In the spring of 2009, public outcry erupted over the multi-million dollar bonuses paid to AIG executives even as the company was receiving TARP funds. Various measures were proposed in response, including a 90% retroactive tax on the bonuses, which the media described as a "clawback." Separately, the term “clawback” was also used to refer to remedies potentially available to investors defrauded in the multi-billion dollar Ponzi scheme run by Bernard Madoff. While the media and legal commentators have used the term “clawback” reflexively, the concept has yet to be fully analyzed. In this article, we propose a doctrine of clawbacks that accounts for these seemingly variant usages. In the process, we distinguish between retroactive and prospective clawback provisions, and explore the implications of such provisions for contract law in general. Ultimately, we advocate writing prospective clawback terms into contracts directly, or implying them through default rules where possible, including via potential amendments to the law of securities regulation. We believe that such prospective clawbacks will result in more accountability for executive compensation, reduce inequities among investors in certain frauds, and overall have a salutary effect upon corporate governance.
Perhaps, "String Them from The Lamp Posts," would have been a better subtitle, but I can hardly think of a more timely and relevant topic than this one. And as long as we have greedy executives and Madoffs (which unfortunately we will), we do need a more refined clawbak doctrine. Good job, guys!