For large public companies, the December 1, 2023 deadline to comply with the SEC's final clawback rules was not unusual from a corporate governance perspective. Prior to the effectiveness of this requirement, many companies voluntarily adopted provisions that substantially meet, or in some cases exceed, the financial restatement clawback policies required by the Dodd-Frank Act. In fact, a recent study by F.W. Cook reported that 80% of large-cap companies have clawback provisions that exceed those set by the SEC.
The SEC's clawback rules are prescriptive and narrow in scope, requiring companies to maintain a policy of recovering excess incentive payments from current and former executive officers upon financial restatement. Enhanced compensation clawback policies adopted by large companies typically include provisions that target broader groups of employees, apply to more than just incentive-based pay, and extend beyond financial restatements. FW managing director Erin Bass-Goldberg explains. Cook sees the proliferation of strong clawback policies as a sign of growing awareness of the importance of internal accounting/governance controls combined with compensation accountability functions beyond Dodd-Frank's clawback policies. .
“We are in an environment where there is much more emphasis from a governance perspective on making sure boards have the tools they need to hold management accountable,” she says. “That view is, 'If there are individuals or groups who act inconsistently with the actions that are being taken – if they are the bad actors – we will put policies in place to hold them accountable for the negative impact. 'The impact of their actions on the company.'
Policies designed to meet the SEC's requirements are a good start, but they may fall short of providing the relief that companies need and that shareholders and proxy advisory firms currently seek from companies. “Many large institutional investors, such as BlackRock, have publicly stated that they prefer broader clawback policies,” said Matt Lamb, a principal at FW Cook, adding that ideally clawback provisions would be , it added that it should be viewed in the context of being one component of a clawback provision. Comprehensive corporate accountability policy. “What we are seeing now is a move beyond compliance to governance best practices to ensure boards have the appropriate compensation accountability tools in their toolbox.”
Compliance in context
Compensation committees should take steps from cataloging the various provisions of compensation programs to understand how they work together and identifying gaps that an expanded clawback policy could fill. You can start the process. For example, a company's annual and long-term incentive programs may include discretion to reduce incentive payments or result in forfeiture of incentive bonuses in the event of termination of employment. “This discussion will encourage companies to consider pillars under the headings of compensation contracts, severance clauses, severance policies, clawback policies, etc., to avoid any surprises, and to ensure that they have a comprehensive approach to compensation liability policies. ”, he suggests. Ram-chan. “Events like this are rare, but if they were to happen, I don't want to be in a situation where I say, “I wish we had a better policy.''
“It's important that all companies, regardless of size, have peace of mind that the policies in place support their accountability,” agreed Bass-Goldberg, noting that any issues that surfaced during the review It added that the gap could help with clawback policy considerations. “In what situations and with which executives do you want to be able to act? And are there any tools available to do that?”
Discussions often identify potential conduct that could cause reputational harm to a company without necessarily requiring a financial recalculation, such as violations of corporate codes of conduct that have a material adverse impact on shareholder value. Companies can also stress test their current practices by running historical or hypothetical situations through their compensation programs to assess whether appropriate accountability measures are provided.
“Policy Simulation Testing – 'What Would Happen If We Did It?'” Lamb said, as with most aspects of executive compensation, there is no one-size-fits-all approach to adopting expanded clawback policies and other provisions. He added that there is no such approach. “These situations are troubling and will require a lot of critical thinking on the part of the board to properly hold the participants involved accountable.”
80% of large-cap companies surveyed reported having more extensive clawback policies in place, with common characteristics:
Covering a wider population: 66% say they have clawback provisions that cover a wider range of people than the SEC requirements, either by position (i.e., VP/Senior Vice President and above), all executive officers, or the entire executive team. Reported. (See diagram above right).
Wider rewards: Although the SEC's clawback requirements mandate only a range of incentive-based compensation, 67% of companies with broader clawback provisions include discretionary cash and/or time-based compensation in addition to incentive pay. Includes stock compensation.
Broader triggers: In addition to financial restatements, many companies also list events that trigger recovery of fees as follows: fraud or fraud (64%); reputational, economic, or other harm (31%); violation of company policy or code of conduct; This expanded to include violations (25%). percentage) or violation of the restrictive terms.
When considering what provisions to include in an enhanced clawback policy, boards should consider the options in terms of how they fit with other ways to hold employees accountable, Bass said. Goldberg says. “It is difficult to envision all possible scenarios in which compensation could be recovered. That is why boards have the discretion to address accountability in a variety of ways, including annual incentive plans, clawback policies, and severance packages. “It's important to have a 'policy,'” she says.
It is also important to keep in mind the need for flexibility and the importance of regularly reviewing provisions to ensure they remain aligned with business strategy and to evolve governance best practices. “This is not a set-and-forget process,” Lamb points out. “A review of clawback provisions should be done as part of an annual review of indemnification risks. Companies should continue to monitor market practices as well as investor and agent expectations.”
