In the cross hairs: today's board is confronted by a much larger panoply of adversaries and penalty pitfalls.

• Author: Zacharias, Carol A.N.
• Position: RISK MATTERS

TODAY S EXECUTIVES are more at risk of personal liability than ever before, confronted by increasingly new forms of actions and new types of damages. Adversaries now include whistleblowers and foreign regulators, recoveries include compensation claw-backs, and cases may even result in imprisonment. Even worse, directors are exposed for a growing list of reasons, even those completely unrelated to their own acts. Seemingly any event provides fodder for blame and the executive is quickly in the cross hairs. This column highlights new adversaries and the newer forms of recovery, and analyzes recent trends in the more traditional shareholder class actions.

* Compensation Clawbacks: Executives are now subject to statutory requirements that they return compensation if their companies must restate their financials. Section 304 of the Sarbanes-Oxley Act of 2002 (SOX) authorizes a company that issues securities registered under Section 12 of the Securities and Exchange Act to recover from chief executive officers and chief financial officers any incentive and equity-based compensation received during the 12 month period following the first public issuance or filing of misstated financials, in cases involving an accounting restatement due to misconduct.

The clawback applies even where the misconduct is not that of the executive. In the early years after passage of SOX, the Securities and Exchange Commission brought only 10 cases under Section 304, and only in instances involving knowledge and misconduct by the executive. However, since then, the SEC has brought more cases, and those in which the executive is not alleged to have any involvement in or knowledge of the misconduct.

Yet another clawback provision was recently promulgated in Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Section 954 requires that the SEC adopt rules requiring that listed public companies have a policy that, in the event the company is required to restate its financials on account of material non-compliance, the company will recoup from current or prior executives incentive-based compensation, including stock option awards, paid in the three years prior to the required restatement, where the compensation is in excess of what would otherwise have been paid.

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Section 954 provides broader rights to compensation clawbacks than Section 304 in numerous respects. There is no requirement of any misconduct, the look-back period is...