The Advisors' Blog

This WTW memo is chock-full of helpful tips for companies that may find themselves in mandatory clawback territory. We’ve addressed a number of the technical and high-level questions a board will need to consider when a company faces a restatement, but this article is focused on managing a good process. For example, it lists items you should include on the agenda for your first special meeting convened after a restatement to make clawback-related process decisions. Here are two of those agenda items:

– Determine if the clawback team is managed by external counsel using compensation experts. Fundamentally, the committee must consider conflict-of-interest questions where management helps to determine clawback values. Our view is that the risk of this being an issue for shareholders diminishes when the sums involved are smaller, the calculation is simpler, and the assumptions or judgment calls needed to complete the calculation are fewer. The more there is at stake, the more likely that both shareholders and officers will question the results and ask about the source of funds, state legal authority and individual taxation; the more complicated the process of performing the calculations becomes, the more plausible these objections will be.

For these reasons, we foresee many situations where the committee would hire its own legal counsel and compensation experts to form the clawback team. To the extent it is available, preservation of attorney-client privilege in communications among the committee, the clawback team and the executive officer(s) also may be desirable.

– Set forth expectations/timing for the clawback team. We anticipate the following will be deliverables from the clawback team:

• A complete Compensation Review Report that details all compensation potentially impacted
• A Calculation Methodology Report that provides details on the methodology employed and the actual calculations
• A presentation of the potential sources of funds to satisfy the clawback
• A recommended proxy disclosure

It also discusses how to perform clawback calculations and how the compensation committee should determine the source of clawback funds. This article is worth reading now and saving for later in the event you’re involved in one of the early restatements post-effectiveness of Dodd Frank clawback policies.

– Meredith Ervine