When Nortel Networks last week reported its long-awaited restatement of results from 2001 through 2003 stemming from an accounting scandal, it also announced that 12 senior executives agreed to return about $8.6 million in bonuses awarded in 2003.

"While none of these executives was found to have been directly involved in the inappropriate provisioning conduct," stated Nortel, "these members of the core executive team share the board's deep disappointment over the circumstances that led to the restatement."

Returning bonuses is not exactly a common occurrence.

In the past, a few high-profile executives have given some of their profits to shareholders who were hurt by the decline in their company's stock.

Winnick

For example, former Global Crossing Chairman Gary Winnick paid $25 million to employees who lost their retirement funds when his company went bankrupt after reportedly making about $750 million selling company stock before the company's stock collapsed.

In 2002, "Chainsaw" Al Dunlop agreed to pay Sunbeam shareholders $15 million as part of a settlement.

And yes, a few companies have trimmed back severance packages to several former executives after they left.

Otherwise, this is quite rare. As we pointed out, last year a federal judge ruled that a government agency cannot withhold $60 million in compensation to the former head of Freddie Mac.

But, this could be starting to change.

O'Hare

For one thing, under Section 304 of the Sarbanes-Oxley Act, if a company restates its results, the chief executive officer and chief financial officer must repay any bonus or other incentive-based or equity-based compensation received during the 12-month period following the initial report and any profits realized from the sale of securities during that 12-month period. “They don’t have to prove the CEO and CFO knew about this [what led to the restatement],” explains compensation expert Bernard "Brian" O’Hare, currently a partner at Patterson, Belknap, Webb & Tyler.

SOX 304

The following excerpt is from Section 304 of The Sarbanes-Oxley Act of 2002

Forfeiture Of Certain Bonuses And Profits

(a) ADDITIONAL COMPENSATION PRIOR TO NONCOMPLIANCE WITH COMMISSION FINANCIAL REPORTING REQUIREMENTS—If an issuer is required to prepare an accounting restatement due to the material noncompliance of the issuer, as a result of misconduct, with any financial reporting requirement under the securities laws, the chief executive officer and chief financial officer of the issuer shall reimburse the issuer for—

Any bonus or other incentive-based or equity-based compensation received by that person from the issuer during the 12-month period following the first public issuance or filing with the Commission (whichever first occurs) of the financial document embodying such financial reporting requirement; and

Any profits realized from the sale of securities of the issuer during that 12-month period.

b) COMMISSION EXEMPTION AUTHORITY—The Commission may exempt any person from the application of subsection (a), as it deems necessary and appropriate.

In addition, some executive compensation agreements are beginning to include provisions calling for the returning of bonuses under certain circumstances. “It’s starting to be talked about,” O’Hare confirms. “Executives are not jumping up and down about putting them in the agreement.”

And, of course, large shareholders are starting to propose resolutions that call for executives of companies that restate results to return bonuses.

Situational, Not Personal

For example, last August, Amalgamated Bank's LongView Collective Investment Fund proposed a measure that asked the board of directors at Computer Associates to adopt a policy that if financial results are restated, the board will review any executive bonuses that were awarded for meeting performance targets and recoup for the company any bonuses that were not, in fact, earned.

The measure failed, receiving only 24 percent of the votes. However, governance experts are very encouraged by the outcome. “We are delighted. It was the first one that we did,” asserts Amalgamated's legal counsel Cornish Hitchcock.

And it wasn’t the last one. Hitchcock has another resolution pending at Dynegy, which will probably meet with shareholders in May. “If you didn’t earn it, you shouldn’t keep it,” he says.

According to Hitchcock, the proposals intentionally avoid being personal—that is, they don’t single out individuals. Rather, they are situational.

In addition to the resolutions at CA and Dynegy, two individual investors—Kimberly and Lawrence Sanchex—filed a similar measure with Bristol Myers Squibb. In 2003, the drug giant announced that it overstated sales by about $2.5 billion over a three-year period, forcing the company to restate net earnings downward by $900 million.

“Those are the only ones we're aware of so far,” confirms Carol Bowie, director, governance research service for the Investor Responsibility Research Center.

But shareholders and lawyers are not the only ones calling for bonus refunds.

Baker

Rep. Richard Baker, R-La., chairman of the House Financial Services subcommittee, which oversees Fannie Mae, fired off a latter on Dec. 16 to Armando Falcon Jr., director of the Office of Federal Housing Enterprise Oversight, asserting that Fannie's current and former executives should be required to return any bonuses they received since 2001 that were based on faulty bookkeeping. "I request your office take action to recapture all bonus payments from executives that were awarded based upon the faulty and deeply flawed earnings statements of the enterprise,” Baker reportedly wrote.

Experts note that the upshot is that the environment is slowly changing. “It’s probably an overstatement to say it is a growing trend,” concedes Patterson Balknap’s O’Hare. “But, it is happening where it did not happen before.”