January 15, 2020
Clawbacks: Shareholders’ Continued Push for “Reputational” Triggers
– Lynn Jokela
Shareholders continue to scrutinize how clawback policies apply to situations of “reputational harm” – the latest examples coming in the form of shareholder proposals from a group of proponents led by the NYC Comptroller. One of the proposals was prompted by a company terminating its CEO “without cause” – i.e. with severance – despite attributing the termination to a violation of company policy. In a letter to the company’s board, the shareholders called on the company to:
– Modify the clawback policy to empower the Board to apply it in cases where an executive’s actions violate the Company’s Standards of Business Conduct, or when those actions damage the Company’s reputation
– Require approval from a majority of shareholders for any future exemption from the general policy requiring forfeiture of unvested equity grants at termination of employment
– Adopt corporate governance enhancements to the Company’s approach to preventing sexual harassment – specifically, assign a standing committee oversight responsibility for sexual harassment prevention system-wide, add sexual-harassment prevention to its director skills matrix, conduct a comprehensive review of the company’s policies and report back to shareholders by year-end 2020
In its announcement for this proposal, the NYC Comptroller’s office points out that it’s successfully negotiated expanded clawback policies at nearly a dozen companies. According to this separate announcement, another recently submitted proposal urges the target company’s board to adopt a clawback policy that will:
Provide that the Committee will (a) review, and determine whether to seek recoupment of incentive compensation paid, granted or awarded to a senior executive if, in the Committee’s judgment, (i) there has been misconduct resulting in a violation of law or Company policy that causes significant financial or reputational harm to Company and (ii) the senior executive either committed the misconduct or failed in his or her responsibility to manage or monitor conduct or risks; and (b) disclose the circumstances of any recoupment if the circumstances of the underlying misconduct are public.