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Bonus clawbacks proposed, but will they be used?

The Citibank Building is shown, Tuesday, Oct. 16, 2012 in New York.

Mark Lennihan/AP

Five years after the financial crisis, major global players are finally getting serious about bonus clawbacks. The question now is whether bank boards will ever exhibit the grit necessary to enforce them.

In the past two days alone, the Bank of England proposed new rules that would order British banks to claw back bankers' bonuses if they acted inappropriately and Citigroup inserted tougher language into its proxy circular, expanding its right to take back money or shares that had already been paid.

It may seem like a sea change. These are venerable institutions, and they are finally showing some teeth. But until bonuses are actually clawed back, the tough language doesn't mean much.

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Scroll through a bank's proxy circular and you'll see a slew of rules and guidelines that boards must abide by. You'll also notice that there is a lot of leniency within the language for each, meaning directors often have some wiggle room. Yes, they can get tough if they want to, but no, they aren't required to.

In the case of clawbacks, the behaviour required to trigger board action is often rather narrow. Even though Canadian banks have been ahead of the curve when it comes to clawbacks, with many instituting new rules in 2009 and 2010, their proxy language often centres on targeting executives or employees whose actions resulted in financial restatements or who were proven guilty of fraud.

There are exceptions. Bank of Montreal can clawback equity payouts "based on information that would have had a negative impact on the size of an award when it was granted." But even that language itself is rather vague.

To get ahead of the curve, Citi tried to shape the language to give directors more chances to crack down. As of 2014, the bank can "cancel all or a portion of an unearned performance share unit or an unvested deferred cash award if it determines that an employee engaged in misconduct or exercised materially imprudent judgment that caused harm to any of Citi's business operations, or that resulted or could result in regulatory sanctions." What constitutes harm to Citi's business is a pretty broad category, so even if the actions weren't illegal, but resulted in a loss, a clawback could be instituted.

The trouble, though, is that we may never know whether these clawbacks are ever implemented. Citi said it will "consider" making public disclosure whenever these rules are used to cancel deferred compensation. That's hardly a guarantee. And given how long proxy circulars can be, the public will only know when deferred compensation is cancelled if the banks explicitly disclose the action.

Still, the latest developments are big news. Let's hope this isn't the last we hear of them.

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About the Author
Reporter and Streetwise columnist

Tim Kiladze is a business reporter with The Globe and Mail. Before crossing over to journalism, he worked in equity capital markets at National Bank Financial and in fixed-income sales and trading at RBC Dominion Securities. Tim graduated from Columbia University's Graduate School of Journalism and also earned a Bachelor in Commerce in finance from McGill University. More

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