Individual Accountability: Not Always Accomplished Through Enforcement

The need to hold individuals accountable for securities violations has sparked a tremendous amount of dialogue in recent years, particularly in the wake of the financial crisis and the Enron-era accounting scandals. Regulators and prosecutors, legislators, and industry leaders have focused on the issue and the need to hold accountable those individuals who were involved in a company’s misconduct. For example, in September 2015, then-Deputy Attorney General Sally Yates issued a memorandum stating that “one of the most effective ways to combat corporate misconduct is by seeking accountability from the individuals who perpetrated the wrongdoing.”¹ Our take on the Yates Memo is that it was an effort by the Department of Justice (DOJ) to broadly refocus attention on individual liability, although most DOJ employees were likely fully focused on this issue long before the memo’s release. Some members of Congress have gone even further, suggesting a potential expansion of individual liability. For example, during Jay Clayton’s confirmation hearing as Chairman of the U.S. Securities and Exchange Commission (SEC), one senator asked Clayton whether he would endorse a regime under which corporate executives would be subject to a strict liability standard for misconduct that takes place under their watch.² Clayton stated that he had not given this issue much thought, but that “[s]trict liability without mens rea … [is] a big step.”³ Clayton’s views are consistent with the traditional view in U.S. jurisprudence that guilt should be personal.

Over the years, Congress has passed a number of laws and implemented different statutory regimes aimed at increasing individual accountability for senior executives. Several provisions passed into law under Sarbanes-Oxley, including the CEO and CFO certification requirements and clawback provisions, were intended to advance this purpose and yield valuable lessons about the effectiveness of such provisions in enhancing individual accountability. Given the upcoming 15-year anniversary of Sarbanes-Oxley, it is a good time to take stock of those lessons. In recent years, however, a different route to holding individuals accountable has been applied in a number of cases by companies that find themselves in regulatory and reputational crosshairs. In the aftermath, or in advance, of penalties imposed on them in connection with regulatory actions, some companies have taken steps to reduce the compensation of senior executives at the company, with respect to both salaries and bonus payments. While to some extent influenced by regulatory actions, this type of market-driven remedy can be an effective way of enhancing individual accountability, particularly since the new administration is unlikely to implement additional regulatory tools in this arena. This development is also responsive to those who have been calling for corporate penalties to be paid, in some way, by executives on whose watch the issues occurred, rather than by shareholders.

Sarbanes-Oxley