October 16, 2015
The Justice Department has released a set of settlement guidelines that target senior executives for individual liability in criminal prosecutions for corporate misdeeds, and, based on early reactions to the guidelines, the change is likely to have implications for compensation and governance. In September, Deputy Attorney General Sally Quillian Yates released a memo stating, among other things, that "criminal and civil corporate investigations should focus on individuals from the inception of the investigation" and "absent extraordinary circumstances or approved departmental policy, the Department will not release culpable individuals from civil or criminal liability when resolving a matter with a corporation." The memo is both a reaction to settlements by the Justice Department earlier in President Obama's term that were criticized by advocacy groups as too lenient and to the fact that no senior executives were prosecuted after the financial meltdown, according to the New York Times. Reactions to the "Yates Memo" as it is known, include that the new prosecutorial standards will put greater focus on internal risk mitigation. According to Richard LeBlanc, Associate Professor of Law at York University, companies should be required to adopt clawback policies based on "risk management and ethics failure, not financial misstatement." Clawbacks along such lines are far more expansive than the pending SEC Dodd-Frank clawback rules, which would only apply in the event of a financial restatement that would have reduced incentive compensation, and have been promoted through shareholder resolutions in the financial and pharmaceutical industries by state and local pension funds. Meanwhile, the government holds considerable leverage in individual prosecutions. According to Jay Dubow, a partner at the Pepper Hamilton law firm, "We have found that the government sometimes puts an unfair amount of pressure on individuals to settle matters when the conduct is questionable at best."