Final Two Dodd-Frank Provisions Could Hinder Boards' Discretion: The SEC could make it tougher for boards to hold executives accountable for their actions.

• Author: Garrett, Michelle
• Position: COMPENSATION MATTERS

Over the past decade, the implementation of Dodd-Frank provisions such as say on pay the advisor independence rules and CEO pay ratio disclosure has significantly influenced the evolution of executive compensation practices and disclosures as well as the role of the board. Now, the SEC has turned its attention to finalizing the open compensation-related Dodd-Frank provisions that remain: clawbacks and pay vs. performance disclosure. Both rules were proposed in 2015.

Institutional investors, proxy advisors and other stakeholders have played a meaningful role in driving expectations around executive compensation structure and governance practices independent of delayed rulemaking. Tying a significant portion of executive pay to financial and other performance metrics achievement, or "pay for performance," has become standard operating procedure, consistent with expectations of the constituencies noted above, with proxy advisors developing their own quantitative and qualitative assessments of the alignment between pay and performance.

Along with this shift to a focus on pay for performance, there has been a move to drive greater executive accountability. In the absence of rulemaking in this area, clawback policies have become commonplace, often allowing for recoupment of compensation not only in the case of restatements or inaccuracies in financial reporting, as is narrowly addressed by Dodd-Frank, but also in connection with various forms of "bad behavior," particularly following several high-profile corporate scandals. And, indeed, the prevalence of clawback policies that include "reputational" or "financial harm" triggers (other than financial restatements) has increased dramatically. The Shearman & Sterling Corporate Governance & Executive Compensation Survey 2020 found that 65% of the largest 100 U.S. public companies have implemented clawback triggers for detrimental conduct not requiring a restatement.

The impact of institutional investors on market practice is particularly notable in this context. BlackRock's U.S. proxy voting guidelines, for example, clarify that the firm favors "recoupment from any senior executive whose compensation was based on faulty financial reporting or deceptive business practices." BlackRock also prefers "recoupment from any senior executive whose behavior caused direct reputational harm to shareholders, reputational risk to the company or resulted in a criminal investigation, even if such actions did not...