January 13, 2021
Clawbacks: A Roadmap for Decision-Making
– Liz Dunshee
The WSJ reported last week that General Electric’s board decided not to claw back pay to former CEO Jeff Immelt and other executives. They had been considering that course of action in response to 11 shareholder demands to investigate breaches of fiduciary duty and securities law violations. The company’s market cap has declined by about $200 billion since 2017 and it recently agreed to pay $200 million to settle an SEC charge that it misled investors about the circumstances leading up to that drop.
Although it’s still pretty rare for companies to claw back executive pay, there does seem to be a growing expectation that that will happen when a CEO’s decisions or actions are closely related to a scandal and/or drop in value. So, some people were surprised that GE didn’t take that step – and perhaps the company’s actions and communications will serve as a roadmap to other companies that face these demands in the future. Based on statements provided by the company and its lawyers, the WSJ reported these steps:
– The board investigated the shareholder allegations by reviewing thousands of documents and conducting dozens of interviews – and concluded it didn’t have a sound legal claim to bring against any current or former officer, director or employee of the company, or against KPMG
– The company enhanced its disclosures and internal controls
– The former CEO didn’t receive any severance when he left GE
– Most of the members of GE’s board have changed since the activities at issue occurred
– No changes to GE’s financial statements were required in connection with the SEC settlement
– The company took action to fire its auditor of more than a century as a result of the accounting issues that led to the stock drop
On the flip side, if the company’s current directors end up encountering resistance to their re-elections because of this, it could be another reason for other companies to strengthen clawback policies and provisions. Boards can benefit from having a strong legal basis for recovery if they find themselves facing shareholder demands to do that. Along those same lines, this Agenda Week post highlights the expansion of “for cause” termination provisions in CEO employment agreements – based on preliminary data from a forthcoming research paper about the #MeToo impact on those contracts.