Clawbacks: Obtaining Beyond the Essentials

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Recent columns discussing various legal issues, such as Girardi’s attorney’s projections for a fraud case in Chicago or the Trump administration’s actions regarding sanctuary laws, have garnered significant readership.

One recent topic of discussion involves clawback policies for executive compensation. Securities and Exchange Commission regulations now require companies to have clawback policies in place to recover mistakenly awarded incentive compensation from executives. These regulations were implemented as part of the Dodd-Frank Act and required companies to adopt compliant policies by December 1, 2023.

While many companies scrambled to meet these requirements, questions now linger around the adequacy of these policies. Compensation committees wonder if the mandatory policy is enough for the company’s risk management approach. Should the company customize the policy or introduce additional measures to better manage compensation risks?

Reports have shown that a large number of companies have gone beyond the mandatory exchange requirements with their clawback policies. Approximately 80% of the surveyed large-cap companies by FW Cook and 70% of S&P 500 companies, according to Dragon GC, have introduced discretionary clawback policies.

The rationale behind these discretionary policies generally revolves around the need to manage risks associated with executive compensation and deter misconduct. While the mandatory policies are very specific, covering certain executive officers, types of compensation, and specific triggering events, many compensation committees feel that they do not address all situations where recovering compensation might be beneficial for the company due to misconduct.

External factors have also influenced boards to adopt discretionary clawback policies. For instance, the Department of Justice’s Criminal Division’s Pilot Program encourages companies to attempt clawbacks from wrongdoers to reduce fines. Additionally, public pressure and proxy voting policies from firms like ISS and Glass Lewis have compelled companies to seek recoupment in cases of executive misconduct.

Companies looking to implement discretionary clawback policies may consider whether to have a standalone policy or include it in the existing Dodd-Frank policy. While Dodd-Frank policies are standard due to stock exchange requirements, discretionary policies can vary significantly from company to company based on scope and procedures.

As companies navigate the complexities of clawback policies in the evolving regulatory and investor landscape, they must carefully consider how these policies fit into their overall risk management strategies and align with shareholder expectations.