Goldman Sachs board demands accountability with widespread 1MDB clawbacks

The clawbacks, ordered by the firm’s board of directors, are part of the fallout from Goldman Sachs’ settlement on charges that it conspired to violate the anti-bribery provisions of the Foreign Corrupt Practices Act (FCPA) related to three bond offerings the firm had structured and arranged for Malaysia’s state development fund 1MDB. Goldman Sachs says it has spent the past five years implementing sweeping improvements to its compliance and internal controls systems as a result of the scandal.

“This is a shrewd move by Goldman’s board to demonstrate they are holding their executive team accountable for a culture of integrity,” said Michael Ward, partner at the law firm Vinson & Elkins and a former chief compliance officer. Ward said the clawbacks send a signal throughout the organization that executives will be held accountable for actions that occur under their stewardship. It sends a message to investors and regulators that Goldman Sachs is committed to a culture of accountability going forward, he said.

The aftermath of a compliance failure of this magnitude led to soul-searching by Goldman Sachs CEO David Solomon and the board, which decided to pass along at least some of the financial pain suffered by the institution itself onto current and former executives.

“The signal the board is sending is an institutional warning to everyone at Goldman. Every executive at every level must raise their hand if they see something improper, and if necessary, must stop it.”

Michael Weinstein, Member, Cole Schotz P.C.

“The Board’s announcement is an important reminder that we are all responsible for each other’s actions, including our collective failures,” Solomon said.

The largest portion of the executive compensation sought to be refunded by the Goldman Sachs board is $76 million from former executives who have been charged or disciplined in connection with the wrongdoing.

The firm will seek to claw back compensation from Tim Leissner, the former Southeast Asia chairman and participating managing director of Goldman Sachs, who pleaded guilty to conspiring to launder money and to violate the FCPA; Ng Chong Hwa, also known as “Roger Ng,” former managing director of Goldman and head of investment banking for GS Malaysia, who has been charged with conspiring to launder money and to violate the FCPA; and Andrea Vella, who in February was prohibited from participating in the banking industry by the Federal Reserve for “unsafe and unsound practices in connection with the bond offerings.” About $24 million of the $76 million is currently being held by Goldman Sachs, the company said.

Going after executives accused of crimes is usually how corporate clawback attempts work. But Goldman Sachs went further.

“In acknowledgement of the firm’s institutional failures,” the board said it will seek to recoup $67 million in long-term performance incentive awards made to five former senior executives. The executives, some of whom have retired, include the former CEO, former COO, former CFO, the former vice chairman who headed Goldman Sachs International, and another former vice chairman who was the global head of growth markets.

And Goldman Sachs went after the pay of its current executive leadership team—the CEO, chief operating officer, and chief financial officer, as well as the current CEO of Goldman Sachs International—by reducing their overall compensation by $31 million for 2020.

Michael Weinstein, a member at the law firm Cole Schotz P.C., said seeking clawbacks from so many executives struck him as most unusual—perhaps unprecedented.

“The signal the board is sending is an institutional warning to everyone at Goldman,” he said. “Every executive at every level must raise their hand if they see something improper, and if necessary, must stop it.”

Corporate attempts to retrieve money already paid to executives who are accused of malfeasance is rare, although when it happens, it gets a lot of attention. Earlier this year, McDonald’s filed a lawsuit attempting to take back up to $41 million in severance paid to its former CEO who lied to the company’s investigators about affairs he allegedly had with several coworkers. In 2017, the board at Wells Fargo clawed back $136 million from its former CEO and another executive who were at the center of the bank’s fake accounts scandal.

The largest clawback ever is believed to be that of former UnitedHealth Group executive William McGuire, who returned $618 million to his former employer in 2007 to settle claims related to backdated stock options. Dennis Kozlowski, the former Tyco CEO, was ordered to pay back $505 million in 2010 to settle a lawsuit filed by his former employer accusing him of looting the company’s accounts for personal gain.

Goldman Sachs’ board said it instituted the clawbacks, forfeitures, and compensation reductions to executive pay “in light of the findings of the government and regulatory investigations and the magnitude of the total 1MDB settlement,” even though “none of the past or current members of senior management were involved in or aware of the Firm’s participation in any illicit activity at the time the Firm arranged the bond transactions.”

Weinstein, a former federal prosecutor, speculated that perhaps the Department of Justice pressured Goldman Sachs to implement the clawbacks.

“They may have indicated it would go a long way toward a more favorable resolution,” he said. “They may have wanted to ensure that a strong signal was sent to everybody that this behavior is not acceptable.”

Ward says the clawbacks could also signal that regulators may be more likely to hold executives at companies accused of wrongdoing personally liable in some way, through a combination of penalties and reputational harm.

“It could become a means of demanding accountability for investment and attention to compliance liabilities,” he said.

The clawbacks are only part of Goldman Sachs’ overall response to the 1DMB scandal and fine, particularly in terms of compliance and internal controls.

In the five years leading up to the settlement, the company says it has completely overhauled its compliance division, nearly doubling its size and making “significant enhancements.” Among those enhancements are systemic changes to the way Goldman Sachs will monitor and evaluate senior executives who are putting together risky deals, the company announced.

The firm’s inability to rein in certain executives who circumvented the company’s internal controls to consummate risky deals is one of the many compliance lessons to be learned from the scandal.

“Over the past several years, we have materially changed our focus to put reputational risk at the center of our decision-making. We must always remain open to improvement, learn from our mistakes and accept the consequences when we fail,” Solomon said.