Equitable Clawback: An Essay on Restoration of Executive Compensation

Abstract:     
The remedy of restoration of compensation, known in the agency context as the faithless servant doctrine, provides for the corporate principal's recovery of compensation previously paid or payable to corporate officers and other agents who have breached their fiduciary obligations. Although a limited clawback provision was one of the reforms enacted as part of the Sarbanes-Oxley Act, courts have refused to imply a private remedy, and, even if they were to do so, it would be of limited utility. Given the many variations of the clawback concept, including the demands for clawback of AIG and Merrill Lynch bonuses and of pre-bankruptcy returns paid to Madoff investors, I have chosen to distinguish the equitable remedy of restoration of compensation as equitable clawback. My essay contends that the remedy's increased recognition and broader use would add primacy to individual versus entity liability, and, consequently, help reestablish the link between executive wealth and executive responsibility.

Number of Pages in PDF File: 22

Keywords: executive compensation, fiduciary duties, faithless servant doctrine, forfeiture of compensation, restoration of compensation, equitable clawback, executive overcompensation, corporate officers, restitutionary remedies, unjust enrichment, entity versus individual responsibility, employment law

JEL Classification: G35, J33, K22, M14, M52

working papers series