On the day that Wells Fargo’s board announced the results of a massive investigation into company fraud, one of the investigating attorneys shared his behind-the-scenes perspective on that and other executive compensation issues with students and faculty at University of Arizona Law.
John J. Cannon III, a partner at Shearman & Sterling in New York City, spoke at Arizona Law April 10 as part of the annual Conversations with Bob Mundheim series, which brings national leaders in business and law to campus.
Cannon is a senior member of Shearman & Sterling’s Executive Compensation & Employee Benefits Group as well as co-chair of its Corporate Governance Advisory Group.
He began his talk by discussing a report regarding Wells Fargo’s sales practices that had been released that morning. The 113-page report detailed an investigation conducted by Shearman & Sterling attorneys, including Cannon.
As a result of the findings in the report, Wells Fargo’s board of directors will claw back $75 million from two senior executives. A clawback is an employment provision forcing an employee to return compensation.
These claw backs—the largest ever in banking—are especially significant because, as Cannon explained, they had never before been used, even though, “On paper, Wells Fargo had the best toolbox for making these kinds of claw back and forfeiture decisions of pretty much any company I’ve seen.”
Cannon noted that a company’s use of claw back provisions could impact a potential executive’s willingness to join that company.
“The executive is thinking, ‘Do I want to go to this place where they’ve already proven that they are willing to not only have these things on paper, but to use these things and cause employees to forfeit tens of millions of dollars?’” he said.
In addition to discussing the Wells Fargo report, Cannon also spoke about common executive compensation issues. One such issue is whether, and to what extent, executive compensation at large U.S. companies includes stock or options awards. He explained that the use of options awards as part of executive compensation has changed over time.
“In the ’60s, ’70s, and ’80s, most institutional shareholders felt that U.S. public companies were not using stock options enough,” Cannon said. “[Shareholders believed] that the real problem with executives was not that they were taking wild risks with the company’s money, but that they were just placeholders that were enjoying the cushy life.”
As a remedy for this problem, shareholders advocated for greater use of stock options, and stock options became very popular throughout the 1990s and 2000s. Following the recession in 2008 and 2009, however, Cannon said, “the whole view of stock options was turned upside down.” He noted that, “It was recognized that an overreliance on stock options would lead executives to be real risk takers.” Consequently, “it was felt that stock options would have to be mixed with equity awards.”
Additionally, another post-recession trend that Cannon highlighted is that “perquisites, the kinds of things you imagine the executive of a big company [receiving]—the limo, the helicopter, the apartment in five different cities—have been cut down quite a bit.”