In July of 2015, the SEC proposed its long awaited rules under Section 954 of the Dodd-Frank Act. The proposed rules would require each listed company to develop and disclose a compensation recoupment, or "clawback," policy that mandates the recovery of excess incentive-based compensation received by an executive officer when the company corrects erroneous financial data by preparing an accounting statement. One of the distinct features of Section 954 and the proposed SEC rules is the fact that misconduct is not required to have been a cause of the restatement in order to trigger compensation recovery. Once these rules are finalized, many public companies will need to either amend their current clawback policies or adopt supplemental policies in order to comply.
The proposed rule would require each national securities exchange and association implement, within one year of the final rules being published, a listing standard mandating that each of its issuers develop, implement and disclose a recovery policy. Although issuers will have 60 days from the effective date of the relevant listing standard to adopt their policies, the policies will cover all incentive-based compensation received by executive officers after the effective date of the final rule.
State of Play
Our Fourteenth Annual Survey of the Corporate Governance and Executive Compensation Practices of the 100 Largest US Public Companies shows that almost all of the largest companies already maintain voluntary clawback policies.
Proxy advisory groups have urged public companies to adopt clawbacks as an element of sound corporate governance and risk mitigation for the past several proxy seasons. Our Survey has shown an increase in voluntary clawback programs from 56 in 2009 (pre Dodd-Frank) to 90 this proxy season. Issuers' voluntary policies, however, are not uniform and their application varies as to the events that trigger recovery, culpability standards, the individuals covered, the types of covered compensation, the covered time period and, as detailed below, the scope of board discretion as to whether to seek enforcement of the policies.
A Matter of Discretion
The vast majority of voluntary clawback policies provide the issuer with discretion as to whether or not to pursue recoupment in any particular case.
The proposed rule generally does not permit discretion to issuers as to whether to seek enforcement of a clawback, with limited exceptions. As a result, an issuer must recover erroneously...