Like Erik, I thought I would offer some thoughts on AALS.  In addition to my role on the BA Section, I also presented at the Section on Remedies, entitled "Remedies in Times of Economic Crisis and Financial Scandal."   Some of the panel's goals were to explore an array of remedial issues, and discuss the legal system's ability to render meaningful remedies in the face of crises.  So I provided a corporate governance perspective on the kind of remedies that may prove effective. 

As an initial matter, I spoke about corporate governance reforms either proposed or enacted, including say on pay, majority voting, and proxy access.  But, in keeping with some of the more typical discussion in this area involving restitution and litigation, I also discussed the status of legal remedies seeking to impose personal liability in the corporate governance arena.  On the one hand, that discussion was relatively short.  This is true basically once one considers Delaware's position in Citigroup, which appears to confirm the strength of the business judgment rule, while highlighting the difficulty of bringing an oversight claim involving business risks.  Thus, the decision seems to confirm the difficulty of imposing personal liability in this area, particularly for the kinds of risk management issues that have garnered attention in this crisis.  While there may be sound reasons for such a confirmation, the decision also seemed to foreclose any lengthy discussion on my part about personal liability as a potential remedy.  On the other hand, I did speak about clawbacks, which can be considered a form of personal liability for directors and officers, and hence an interesting remedy that may merit more thoughtful discussion--even (and perhaps especially) if as Erik noted, it also can be deemed as draconian.

In terms of corporate governance reform, clawback provisions not only appear in TARP legislation, but also in some proposed bills.  Although definitions differ, such provisions generally require companies to institute a policy whereby they can recover bonus or incentive-based payments determined by criteria later discovered to be fraudulent, the subject of restatement, or otherwise the product of wrongful conduct.  To the extent imposing personal liability has a role to play in corporate accountability (a point I know that many would debate), clawbacks may serve to fill that role.  Then too, clawbacks could serve other remedial goals including compensation for victims and deterrence.  However, in addition to general issues about the appropriateness of personal liability in this arena, clawback provisions raise concerns about their effectiveness and appropriateness.  Also, because clawback provisions are contingent on fraud or wrongful conduct, and in some cases, knowledge of such conduct, those provisions may generate problems of proof that may make it difficult to recover under them.  This is especially true if clawback provisions apply to conduct involving so-called excessive risk taking, because it may be difficult to draw the line between appropriate and excessive risk.  Moreover, because it may be difficult to pinpoint the inappropriate conduct that could subject one to clawback, it also may be difficult to utilize such provisions as deterrence mechanisms.  And even if these problems can be overcome, there may still be problems with recovery.  One proposed bill notes that companies should seek recovery "to the extent feasible and practical," hinting at the fact that in some cases officer and director funds based on bonuses and other incentive pay may have been spent or otherwise difficult to get back.  As Professors Cherry and Wong indicate in their paper, private ordering may be most effective in this area where these and other issues can be ironed out.  But such issues certainly need to be considered in order for clawbacks to have some teeth. 

Perhaps a final problem with relying on clawbacks as a remedy is that such a remedy may easily be side-stepped if companies are willing to avoid paying incentive-based compensation.  Indeed, in this environment, eliminating bonuses may be seen as a good thing.   In any event, clawbacks certainly can be an intriguing remedy and hence worthy of further consideration.

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