[News Terms] Financial Sector to Curb 'Tricky Money Parties'... Introduction of 'Clawback' System

The U.S. Securities and Exchange Commission (SEC) has been enforcing a law since November last year that requires listed companies to claw back bonuses paid to executives and employees if financial statements are misstated. The purpose is to prevent management from temporarily inflating stock prices by exaggerating financial performance or holding a "bonus party," only to later revise the financial statements.

This system, which allows companies to reduce or cancel bonuses of executives and employees who cause losses to the company or damage the company's reputation through unethical behavior, is called a "Clawback." The term "clawback" means to claw back or retrieve. It was first introduced by European financial firms that suffered huge losses during the 2009 global financial crisis, and now major investment banks such as Morgan Stanley, JP Morgan, and Credit Suisse include this clause in employee contracts when hiring.

The clawback system spread in the U.S. following an incident in 2011. At that time, a Morgan Stanley executive, intoxicated at a year-end party, got into an altercation with a taxi driver over the fare while taking a taxi home and threatened the driver with a pen knife from his bag. Although he was taken to court, he was ultimately acquitted. However, Morgan Stanley fired him just before the acquittal, citing a violation of the company’s code of conduct.

He later disputed with Morgan Stanley over $5 million (approximately 670 million KRW at the time) in deferred bonuses accumulated during his tenure. Morgan Stanley argued that under the clawback clause, which allows the company to reclaim bonuses if an employee engages in unethical behavior, it was not obligated to pay the bonuses. Currently, about 90% of U.S. manufacturing companies have adopted and apply this system.

South Korea also has regulations similar to clawback. Article 9, Paragraph 3 of the Financial Company Governance Supervision Regulations states, "If a loss occurs to a financial company related to the duties during the deferred payment period, the deferred performance-based compensation shall be recalculated reflecting the realized loss amount." However, most domestic financial companies do not incorporate this clause into their internal rules, and even if the regulation exists, there are no known cases of actual enforcement.

Last year, when commercial banks held a massive bonus party based on record-high earnings, criticism intensified, bringing clawback back into the spotlight, but it did not lead to the introduction of the system. Instead, the Financial Services Commission decided to strengthen the "Malus" system, which adjusts deferred bonuses rather than clawing back bonuses, to reduce unpaid deferred performance-based compensation if executives or employees cause losses to financial companies or commit errors in financial statements.

This content was produced with the assistance of AI translation services.