March 10, 2020
Clawback Policies: Suggestions for Strengthening
– Lynn Jokela
Liz blogged earlier this year about how clawback policies may be turning restatements into a rare species. Recently I came across this memo discussing why, even with a restatement, we don’t seem to read a lot about actual clawbacks when the vast majority of companies in the S&P 500 have adopted clawback policies. Perhaps clawback policies just need more teeth and for a company wanting to strengthen its clawback policy, the memo includes suggestions.
The memo references a study of 242 companies with voluntary clawback policies that later restated earnings and the study found only 3 of the companies disclosed activation of a clawback in their proxy statements. It says one of the reasons is that clawback policies leave a lot of unanswered questions so the question of a clawback is left to the board’s determination. Suggestions for strengthening a clawback policy include:
– List the actual names of the executives covered by the policy in the annual proxy statement
– Identify a specific time period describing how far back in time the company can go to claw back incentive pay from covered executives
– Detail the types of compensation the company can recoup
– Exclude words that give the board of directors discretion to enforce a clawback (for example, don’t use language such as “the board has an option to recoup if an executive is proven to have engaged in misconduct”)
– Specify a meaningful amount (taking the executives’ total compensation into account) that’s subject to clawback
Another factor noted in the memo is that the board should have a deadline to enforce the policy and activate a clawback. The memo includes marked sample clawback policy language to help make a clawback policy stronger.
What was perhaps more eye opening was the memo’s reference to a research paper suggesting companies that voluntarily adopt clawback policies are more likely to issue pessimistic earnings guidance, which leads to lower investment returns for stockholders compared to stockholders of companies without clawback policies.