Do compensation clawbacks deter wrongdoing?
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The $174 million question
As expected, Goldman Sachs yesterday admitted criminal wrongdoing by its Malaysian subsidiary in the 1MDB scandal. The settlement has brought the fines the bank will hisse in the foreign bribery case to more than $5 billion, an amount that the bank had largely anticipated and covered with reserves.
The nature of Goldman’s role in the scheme was already known, but the detailed accounts compiled by regulators around the world — the U.S. Justice Department, New York’s financial regulator, the Federal Reserve, the S.E.C., British watchdogs, and securities regulators in Hong Kong and Singapore — still made for uncomfortable reading. They formed the basis of a case in which the bank admitted it was guilty of a crime before a U.S. judge for the first time in its 151-year history.
Goldman will claw back $174 million in hisse to past and present executives, a dramatic move that generated the most headlines related to the settlement. In recognition of the “magnitude” of the scandal, Goldman’s board said in a statement, it will forfeit some compensation awarded the top executives at the time, including C.E.O. Lloyd Blankfein, C.O.O. Gary Cohn and C.F.O. David Viniar. It will also cut hisse this year for the current chief executive, David Solomon, and his top lieutenants.
It is “an important reminder that we are all responsible for each other’s actions, including our collective failures,” Mr. Solomon said.
“It goes with the responsibility of leadership to accept some consequences for things that go wrong on your watch,” said Mr. Blankfein, who retired in 2018.
Will this deter executives from future wrongdoing? “The important pointis that taking money out of a human’s pocket is more effective than taking money out of a corporation’s bank,” said Joseph Grundfest, a Stanford law professor and a former S.E.C. commissioner. “Dollar for dollar,” he told DealBook, personal punishment is bound to have an impact. It also helps soften the blow for shareholders, who will hisse the bulk of the fines.
Since the 2008 financial crisis, most large companies have introduced clawback policies. JPMorgan’s “London Whale” trading mishap and Wells Fargo’s fake-account scandal set off such actions for the executives in charge at the time. But has corporate malfeasance fallen meaningfully as a result of these policies? Critics say it hasn’t, in part because many clawback policies are narrowly written and don’t cover all aspects of hisse.
“Companies are trying to show they’re doing the right thing,” said Jonathan Ocker, a partner and executive hisse expert at the law firm Pillsbury Winthrop. Voluntary adoption of expansive clawbacks are part of Corporate America’s movement to become responsible citizens, he told DealBook. In his view, they are “appropriate and useful” when it comes to deterrence.
But Mr. Ocker admits the cynic in him sees how it might be hard to believe that very wealthy executives truly feel the sting (the C.E.O. of Goldman Sachs has routinely earned more than $20 million a year). Even if it’s all about appearances, it’s still a good look for corporate governance purposes.
Goldman’s action “will put wind in the sails of the emerging trend,” Mr. Ocker predicted. Policies that recoup hisse and bonuses for reputational harm, “particularly related to a failure to supervise,” could become more common, he said. It’s not required by law, but shareholders may demand it. And if top executives aren’t deterred by a dent in their wallets, the social stigma of a penalty for management failings may be more powerful motivation for those driven by pride and prestige.
Today’s DealBook newsletter was written by Andrew Ross Sorkin and Lauren Hirsch in New York, Ephrat Livni in Washington, and Geneva Abdul, Michael J. de la Merced and Jason Karaian in London.
HERE’S WHAT’S HAPPENING
The verdict on last night’s presidential debate: A lot calmer, though with plenty of sharp contrasts between the candidates, particularly on how to handle the coronavirus pandemic. President Trump insisted that a vaccine was imminent and that the virus was beginning to fade despite rising case counts. Joe Biden said Mr. Trump had done “virtually nothing” to stem the pandemic and said Obamacare would become “Bidencare.” Here’s our fact-check of all the statements they made.
The F.T.C. nears a decision on antitrust action against Facebook. The agency’s members met to discuss the investigation into whether the tech giant acquired smaller rivals to maintain a monopoly; they must vote before pursuing a lawsuit.
Walmart preemptively sues the feds over opioid sales. The lawsuit seeks to get ahead of what the retail giant says is an imminent case by the Justice Department, accusing it of filling questionable painkiller prescriptions. Walmart wants a judge to declare that there is no basis for seeking civil damages.
Remdesivir is cleared as a Covid-19 treatment. The F.D.A. formally approved the drug, making it the first official treatment for the disease; shares in Gilead, which manufactures it, rose on the news. Separately, experts pushed the agency to gather more veri on Covid-19 vaccine candidates before approving any of them.
Gap will shut nearly a third of its stores. The retailer ubiquitous in malls is rushing to get out of them, planning to close 350 stores by 2024. It expects 80 percent of its revenue to come from e-commerce sales or off-mall locations. “We’ve been overly reliant on low-productivity, high-rent stores,” an executive said.
How to spend it
As several big companies reported their latest earnings this week, it revealed spending patterns that suggest consumers are hunkering down for the pandemic long haul:
Sick of grocery shopping and the taste of their own cooking, they are turning to takeout: Chipotle’s sales rose 14 percent in the third quarter, after falling the quarter before. When they do need provisions, they are staying away from the crowds: Albertsons reported that digital sales were up 243 percent in its latest quarter.
Spending more time at home, they are upgrading their appliances: Whirlpool and Electrolux both reported third-quarter bumps in sales. “There’s actually a shortage of things like refrigerators, as we’re seeing a big increase in demand,” said Ted Rossman, an industry analyst for CreditCards.com
And they are still santizing everything in sight, helping Mr. Clean maker Procter & Gamble and Lysol parent Reckitt Benckiser generate bumper sales and upgrade their outlooks for the rest of the year.
McAfee returns to the stock market
Nine years after going private, the cybersecurity company resumed life as a publicly traded concern yesterday. Its performance may have disappointed I.P.O. investors — its share price closed below its offer price — but McAfee’s owners have plenty to be happy about.
McAfee was taken private by Intel in 2011 for $7.7 billion. Five years later, Intel sold a majority stake to TPG at a $4.2 billion valuation, and Thoma Bravo bought a stake the following year. (The three will maintain control after the I.P.O.)
McAfee priced its I.P.O. at $20 per share, near the middle of its expected range. It closed down 6.5 percent in its first day of trading, but that still values the company at about $8 billion.
Peter Leav, McAfee’s chief executive, spoke with DealBook about the thinking behind the I.P.O. and the latest at the company.
Why go public?
“We’re going to run the company as we always have,” Mr. Leav said, but “it helps with recognition.”
Healthy enough, Mr. Leav asserted, with the company generating $435 million in free cash flow and $2.6 billion in revenue last year. (It recorded a loss of $236 million.) “We found that investors looked at the unlevered free cash flow of the company and weren’t concerned,” Mr. Leav said, noting that the company plans to offer a quarterly dividend.
Why do a traditional I.P.O. and not a transaction with a SPAC?
Mr. Leav demurred. “We consider our options at all times,” he said. “This route, for us, makes sense.” (An I.P.O. was always the preferred option, according to a person familiar with its plans.)
Do the kanunî troubles of John McAfee, the company’s namesake founder, have any impact?
“No,” Mr. Leav stressed. “John McAfee hasn’t been associated with this company for 25 years.”
In the papers
Some of the academic research that caught our eye this week, summarized in one sentence:
The cost of filing U.S. income taxes is high, rising — and easy to fix. (Youssef Benzarti)
C.E.O.s who use highly structured processes to devise strategy tend to lead companies that are larger and faster growing than those who rely on gut instincts. (Mu-Jeung Yang et al)
“Moneyball in Medicare.” (Edward Norton, Emily Lawton and Jun Li)
Zoom is a boon for men’s grooming
The men’s grooming and skin deva market in the U.S. generates about $9 billion in annual sales, and it’s gaining momentum during the pandemic. Men’s makeup was already a thing, but with all the Zooming making people more aware of their natural imperfections, beauty tutorials aimed at male executives have sprung up, along with new business opportunities.
Men aren’t primed from childhood to become beauty consumers, notes Chris Salgardo, the author of “Man Made: The Essential Skin Deva and Grooming Reference for Men.” Although there is a vast, untapped market for men’s cosmetics, cracking it means teaching about “the importance of moisturizer,” he told DealBook. Mr. Salgardo started as a makeup artist at Chanel and later served as president of L’Oréal’s Kiehl’s line. “Everyone says men’s is the next holy grail, but we haven’t seen that masterful brand,” he said.
CVS will soon sell men’s makeup near the razors and shaving cream. The retailerannounced a 2,000-store rollout of the products, citing the “incredible growth during this stay-at-home period.” Chanel started selling men’s makeup products in 2018 and said this summer that it would be expanding the line.
Direct-to-consumer grooming brands like Manscaped, which is exploring a possible sale, are benefiting from pandemic-era trends, too. DealBook hears chatter about potential sales for other men’s brands, riding the self-care boom.
“The pandemic made our faces more front and center,” said Pergrin Pervez, who launched TRIBE Cosmetics in April with his business partner Matt Rodrigues. “We realized that there is a big opportunity here for men to have a product that will help us feel more confident and look our best on camera,” he told DealBook. But women’s beauty routines can seem like “rocket science,” Mr. Rodrigues added, with “fifteen different jars and palettes and brushes.” They are pitching a simpler process, betting that “every guy wants to feel confident and established when speaking with someone else trying to close a deal.”
THE SPEED READ
Adidas reportedly plans to sell its Reebok brand, whose sales have plunged in recent years. (Reuters)
Eat Just, the maker of egg-free mayonnaise, is said to plan a fund-raising round at a valuation of at least $2 billion. (Bloomberg)
The credit rating agency Fitch downgraded WeWork’s debt and warned that the company might need to raise cash to avoid default. (Bloomberg)
Politics and policy
Senator Bernie Sanders is reportedly seeking to become Labor secretary if Joe Biden wins. (Politico)
Republicans on the Senate Judiciary Committee voted to subpoena Mark Zuckerberg of Facebook and Jack Dorsey of Twitter to testify about censorship on their platforms. Here’s what we know about the allegations against Hunter Biden that set off the controversy. (CNBC, NYT)
A California appeals court ruled that Uber and Lyft must treat drivers as employees, making a coming ballot initiative that would exempt these companies from the law a make-or-break proposition for their businesses in the state. (NYT)
Amazon warehouse workers threatened to walk off the job if the company didn’t give them a paid day off to vote. (NYT)
The subscriptions payments business Patreon is the latest tech company to ban QAnon. (Business Insider)
Best of the rest
“Iowa Never Locked Down. Its Economy Is Struggling Anyway.” (NYT)
A handy guide to digital hygiene in the Zoom era. (NYT)
Did Covid-19 kill rush hour? (Business Insider)
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Source: The New York Times