Companies Rarely Get Back Bonuses from Ex-CEOs
The New York Times reported that 414 companies restated earnings in 2004 alone, but a review of the restatements shows that large corporations rarely get bonus money back from executives, even when the bonuses were based on numbers that were questionable, inflated or inaccurate.
For example, William A. Wise, former chief executive of a Houston energy company called the El Paso Corporation, received a $3.4 million bonus, among other rewards, when the company reported a $93 million profit in 2001. Last year, the company reported that the company actually lost $447 million in 2001, and that "certain personnel used aggressive, and at times, unsupportable methods to book proved" oil and gas reserves, the Times reported.
Wise and many others who earned bonuses for meeting fake performance goals, will not be returning the money.
Investors had hoped corporate reform legislation would help them recoup some of their losses from executives who grew rich on stock prices inflated by incorrect earnings reports. But that hasn't happened.
The Sarbanes-Oxley Act requires chief executives and chief financial officers to pay back bonuses if they were based on incorrect numbers. In addition, the payback is required if there is an accounting restatement and evidence of misconduct. So far regulators have not enforced the provision, in part because the law took effect only in July 2002, the newspaper reported.
Lawyers said other reasons for failing to go after the bonuses could be the fear of bad publicity, the cost of litigation or contracts that let CEOs keep compensation once their checks have cleared.
"The employment contracts don't have the necessary clauses in them to give the board the power to go draw that back, and that's something that boards really need to change," said Lynn E. Turner, a former chief accountant at the Securities and Exchange Commission who now oversees research at Glass Lewis & Company, which compiled the list of restatements for the New York Times.
Turner said executives given bonuses based on data that turn out to be wrong should voluntarily return the money.
"I just think that morally, if the bonuses should never have been paid out to that group, then that group shouldn't get to keep any of it, regardless of the law," he said.
SEC Commissioner Harvey J. Goldschmid said the agency would try to recover more than bonuses from executives who gain from fraud. "Where hard-core fraud is involved, senior executives will have to disgorge all of their compensation," he said. "We'll ask for everything."