Clawbacks have been around for more than a decade.
- Beginning in 2002, Sarbanes-Oxley required CEOs and CFOs to reimburse incentive or equity compensation received or profits from the sale of company securities during the twelve months following issuance of financials that were subsequently restated due to misconduct.
- Dodd-Frank expanded the concept in 2010 by mandating new stock exchange listing standards to require companies that restate their financials due to noncompliance with SEC financial reporting requirements to recover from current and former executive officers the excess amount of any incentive-based compensation received due to the erroneous data during the preceding three years.
The problem is that the SEC has yet to adopt rules to implement the Dodd-Frank provision. As a result, many companies have delayed adopting a clawback policy (or updating their old Sarbanes-Oxley policy) until the new rules are effective. Their thinking is that it makes no sense to do so now and then have to immediately revise it to comply with new rules.
That approach made a lot of sense when everyone thought the new clawback rules would appear in 2011. But here we are in 2014 and still no rules. SEC Chair Mary Jo White has said that the clawback issue is complex, and she is vague about when proposed rules might be forthcoming. However, SEC Commissioner Kara Stein highlighted in a speech last week that clawback rules should be an SEC priority. Most observers think new rules will be proposed this year, but it’s hard to say for sure.
In the meantime, ISS and Glass Lewis are dinging company governance scores for failure to adopt a clawback policy and for policies that are, in their opinions, too soft.
Does it still make sense to wait for the SEC to act before adopting or updating your clawback policy?
The answer is: It depends.
Adopt now: If you have the kind of Board that prefers to proactively manage corporate governance and would not be put off by needing to tweak a recently adopted policy, then by all means go ahead and adopt one. Certainly plenty of other companies have already done so. (According to Equilar’s 2013 Clawback Policy Report, 89% of Fortune 100 companies have a publically disclosed clawback policy.) This tends also to be the case for mid-size companies in highly regulated industries, like financial services, or that are aggressive with shareholder engagement. Although there are a few ambiguities in the statute (for example, how to treat options and incentive compensation based also on non-financial factors), the SEC rules are likely to closely track its substance, so any necessary policy amendments should be minor.
Wait for the new rules: If your Board tends to have a wait-and-see attitude about these things or is less concerned about proxy advisor governance scores, then there is little to be gained by moving forward at this time. Despite the SEC’s poor clawback rulemaking record, it seems likely that we’ll see something later this year.