The Advisors' Blog

With ISS’s FAQ update last month, there is now one more reason to review your company’s approach to clawback policies and provisions. A recent Debevoise memo summarizes key voting policies on this topic:

– ISS recently clarified in its FAQs on executive compensation policies that, for purposes of ISS’s say-on-pay vote recommendation, clawback policies must explicitly cover all time-vesting equity awards in order to receive credit for a “robust” clawback policy. This is consistent with the view ISS had already taken for purposes of analyzing equity-based incentive program proposals under its Equity Plan Scorecard (“EPSC”) policy. Under ISS’s FAQs on Equity Compensation Plans, in order to receive EPSC points for the clawback policy factor, an issuer’s clawback policy should authorize recovery upon a financial restatement and cover all or most equity-based compensation for all NEOs, including both time- and performance-vesting equity awards.

– Glass Lewis’s view on clawback policies under its 2025 U.S. Benchmark Policy Guidelines is that effective clawback policies should provide companies with the authority to recoup incentive compensation (whether time-based or performancebased) in the event of a restatement of financial results or similar revision of performance indicators upon which the awards were based. In addition, recovery should be available when there is evidence of problematic decisions or actions, such as material misconduct or a material reputational failure, material risk management failure or material operational failure, the consequences of which have not already been reflected in incentive payments and where recovery is warranted. Glass Lewis expects that this authority to recoup should be provided regardless of whether the employment of the executive officer was terminated with or without cause.

– BlackRock’s view, expressed in its 2024 Proxy Voting Guidelines for U.S. Securities, is that it favors prompt recovery from any senior executive whose compensation was based on faulty financial reporting or deceptive business practices. This includes DoddFrank-compliant policies and broader policies requiring recovery from (or the foregoing of) the grant of any awards by any senior executive whose behavior caused material financial harm to shareholders, material reputational risk to the company or resulted in a criminal investigation, even if such actions did not ultimately result in a material restatement of past results. BlackRock generally supports shareholder proposals on these matters unless the company already has a robust clawback policy in its view.

The memo notes that even for the largest U.S. companies – most of whom already have policies or provisions that go beyond Dodd-Frank requirements (e.g., additional triggers, a broader group of covered employees, etc.) – it’s a good time to take a fresh look at policies. And companies that don’t go beyond what’s mandated may want to discuss whether to change that. In addition to proxy advisor and investor positions, compensation committees should consider the DOJ’s pilot program and company-specific factors. The Debevoise team recommends taking these steps:

1. Where companies have existing discretionary policies, companies should review these policies to confirm whether any standalone clawback policy or related terms set forth in an incentive plan are sufficiently rigorous under proxy advisor or shareholder guidelines. Consider whether any changes are appropriate for the organization.

2. For companies without existing discretionary policies, consider whether the board should have the authority to recoup compensation in other circumstances to comply with proxy advisor guidelines or to otherwise strengthen the company’s corporate governance program. While industry and peer benchmarking can be instructive, companies should design discretionary policies that reflect their own unique risks and organizational and compensation structures.

3. Engage with legal counsel to ensure that all clawback policies are enforceable under state laws and are integrated into agreements where appropriate.

Programming Note: Happy Thanksgiving, everyone! We’ll see you back here next week.

– Liz Dunshee