By G. A. FINCH

What are we to make of the recent spate of claw-back headlines?

Barclays Bank intends to claw back shares from its former Chief Executive Officer Robert Diamond for the LIBOR rate-fixing scandal

J.P. Morgan Chase has revealed it intends to claw back compensation from its Chief Investment Officer Ina Drew, the trader Bruno Iksil, and others for the $5 billion “whale trading” fiasco.

The defunct “Big Law” firm of Dewey & LeBoeuf LLP, now in bankruptcy, has tendered to over 700 of its former partners a claw-back settlement demand or they will face certain tortuous litigation.

These claw backs aim to retrieve compensation already received by these respective executives and law partners.

As I indicated in a previous blog post, a claw back provision, under certain conditions, permits a company to demand repayment of compensation previously paid to executives.  Those conditions usually involve compensation paid to executives based on performance measures or factual circumstances that turn out to be inaccurate, false, or fraudulent.  It can be based on statute or by contract.

The claw back in the Dewey situation involves the  legal principle of “insider preference” which disallows a transfer of property by a bankruptcy debtor  (like Dewey) to an insider (like one of its  partners) to the disadvantage of another unsecured creditor.

In  Dewey’s case, the  firm’s bankruptcy estate is offering the deal to gain cash to pay down its debt in exchange for the ex-partners’ release from liability.  The alternative is having personal liability for the law firm’s debt and being pursued by its unsecured creditors.

By statute and contract our free market economies attempt to regulate or bind executives to uphold and adhere to legal and moral conduct.

Can we legislate ethics or contract for morality?  The Ten Commandments is a combination of law and covenant to do the right thing.  We also have claw-back laws on the books like the Sarbanes –Oxley Act of 2002 and the U.S. Bankruptcy Code, and in the case of not-for-profits, state not-for-profit corporation laws and common law.

A person’s reputation takes years to build and only a minute to be destroyed by some real or perceived illegal or immoral act.  Executives must be vigilant about their ethics and business choices.

The public, whether they are the residents of Main Street America, the self-described 99 per centers, or good corporate governance types, really is fed up with reckless, risky corporate financial behavior and outsized compensation packages that bear little relation to performance by the executives receiving them.  Greed is not good.  For executives, ethical behavior is always the right thing to do personally, organizationally, and globally.

Claw-back mechanisms are necessary to do justice and to reassure the public that fairness, honesty and proportionality will be promoted and protected.  We are still in uncertain, unstable economic times and there is much economic hardship.  Such conditions make ripe the seeds of class warfare that always underlie the surface of a capitalist economy.  I love capitalism and there is no better system; however, it cannot be unbridled and must be tempered with appropriate controls like statutory and contractual claw-back provisions.

As for the headlines, I say bravo for the increased use of legitimate claw-back mechanisms.