Executive compensation clawback policies continue to grow in popularity. Although the Securities and Exchange Commission (SEC) has not yet finalized its rules under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) that will require publicly-traded companies to adopt compensation recovery policies, many companies have now voluntarily adopted clawback policies.
More than 90 of the 100 largest publicly-traded companies have disclosed that they maintain compensation clawback policies. A large number of companies have been revisiting their existing clawback policies and considering potential updates, and some have sought to recover compensation under their policies.
This article summarizes trends in clawback policies and some lessons that can be learned from the growing body of experience with them. For companies that are considering adopting or updating clawback policies, these trends and experiences may help to guide their design decisions.
1. Compensation Clawback Trends
Publicly-traded companies have had mandatory clawback requirements since the Sarbanes-Oxley Act was enacted in 2002. Sarbanes-Oxley imposed a relatively narrow clawback requirement that applies only to the CEO and CFO and is triggered only if a restatement of financial results occurs as a result of misconduct.
In 2010, Dodd-Frank included a more expansive clawback requirement that would apply to all executive officers (not just the CEO and CFO) and would be triggered by restatements of financial results, whether or not they were caused by misconduct. However, the Dodd-Frank clawback requirement is not yet effective due to a delay in the publication of final rules. (Proposed rules were issued in 2015, but they have not been finalized.)
Apart from legally required clawback policies, many publicly-traded companies have voluntarily adopted clawback policies in response to pressures from proxy advisory firms or investors or out of a belief that clawbacks are part of good governance.
There has been a notable trend in these voluntarily-adopted compensation clawback policies to broaden them to apply in more circumstances and cover additional types of compensation and conduct. In addition, proxy advisory services and institutional investors have in recent years adopted policies favoring clawback policies with specific designs. Some areas in which clawback policies have broadened, as well as certain proxy advisory and investor policies, are discussed below.
A. Financial restatements triggering clawbacks without misconduct
One way in which some clawback policies have been broadened beyond the original scope of Sarbanes-Oxley is to include as triggering events financial restatements that are not the result of executive misconduct. This trend was likely given momentum by Dodd-Frank and the SEC’s anticipated rules under Dodd-Frank, which would require recovery of compensation following a qualifying restatement of financial results regardless of executive misconduct.
B. Reputational harm
Another way in which some clawback policies have been broadened is to include as triggers events that would result in non-financial harm, such as reputational harm. Reputational harm triggers are generally intended to allow a company to recover compensation in the event there is a corporate scandal that does not directly impact financial performance. Such events are often defined to include unethical business practices, problematic corporate cultures, or #MeToo harassment or similar behavior.
C. Failure to supervise or identify risk
Some recent clawback policies include as grounds for a clawback failures in supervision, such as behavior by subordinates likely to cause reputational harm, or a failure to identify and elevate risks appropriately.
D. Breach of policy or restrictive covenants
It is increasingly common for clawback policies to include as a triggering event for a recovery of compensation an executive’s policy violation or breach of a noncompetition obligation or similar agreement. E. Selected proxy advisory firm and investor policies Leading proxy advisory services, such as ISS and Glass Lewis, as well as institutional investors, have encouraged a trend toward more expansive clawback policies through their voting policies. Some of their policies are summarized below:
