The SEC took a step toward enacting the last executive compensation provision in the Dodd Frank Act when it proposed rules
on clawbacks of executive compensation July 1.
Under the rules, the national securities exchanges would have to implement new listing standards that would require companies to adopt policies stipulating that executive officers must pay back incentive-based compensation that they received in the three years before companies issued accounting restatements to correct material errors.
Executives who would be subject to the policies would include a company’s president, principal financial officer, principal accounting officer, any vice president in charge of a principal business unit, division or function and any other person who deals with policy making. The recovery of these executives’ incentive-based pay would be required regardless of whether an executive committed misconduct or had any responsibility for the financial statements containing a material error. Companies would be forbidden from indemnifying executives from any clawbacks.
These rules would ramp up significantly the clawback provisions contained in the Sarbanes Oxley Act. Those permitted the recovery of compensation only in circumstances that involved misconduct, applied to the incentive-based pay of only CEOs and CFOs and reached back just one year after a restatement was issued by a company.
The type of executive compensation that could be clawed back under these new proposed rules includes incentive-based pay granted, earned or vested based wholly, or in part on the attainment of any financial reporting measure, such as stock price or total shareholder return. Listed companies would clawback compensation in the amount of the difference between the incentive-based compensation actually paid to an executive officer and the amount that should have been paid as measured by the restated financial statements. If compensation is based on a company’s stock price or total shareholder returns, the company could estimate how the incentive-based compensation in question was affected by the material error in the original financial statements.
Companies would be required to pursue recovery of excessive incentive-based compensation unless doing so imposed undue costs on itself or its shareholders, or, in the case of foreign companies, violated any non-U.S. laws.
Listed companies would be required to disclose as part of their annual reports and filings the following information regarding clawbacks:
• If they had a restatement in the previous year, and, if so, the date it was required to prepare the restatement
• The aggregate dollar amount of excess incentive-based compensation attributable to the restatement and the aggregate dollar amount still outstanding at the end of its last completed fiscal year
• The name of each person subject to recovery from whom the company decided not to pursue recovery
• The amounts due from each person and the reason for not pursuing.
• If any executive officer failed to return within 180 days incentive-based compensation owed, that officer’s name and the amount due
The proposed rules are not likely to be implemented any time soon. U.S. stock exchanges must finalize their listing standards within 90 days of a final SEC rule’s publication. That rule would become effective within one year of publication, and then listed companies would be required to adopt clawback policies no later than 60 days after the stock exchange’s listing standards go into effect.
In the 2015, the UAW Retiree Medical Benefits Trust once again focused on clawbacks of executive pay. For the third year in row, the trust submitted proposals asking companies’ boards to adopt a policy to recoup incentive pay when misconduct has resulted in significant financial and reputational harm and to disclose annually general information about whether or not they used the policy.
This year, the trust engaged on this topic with companies in heavily regulated sectors like healthcare, energy, finance or defense production. A coalition of 10 institutional investors led by the trust wrote to, and had a dialogue with, seven companies. The coalition settled with five of the companies where they achieved strengthened policies and disclosure. A clawback proposal co-filed with the Nathan Cummings Foundation garnered the support of 40 percent of the votes cast at SunTrust Bank, and one co-filed with the New York City Comptroller’s Office received 44 percent of the votes cast.
Given the UAW Trust’s work in this area, it plans to carefully review and comment on the proposed rules devoting special attention to the provisions on disclosure of the use of companies’ clawback policies, said Meredith Miller, the trust’s chief corporate governance officer.