In anticipation of the December 1st deadline to have a Dodd-Frank compliant clawback policy in place, Meridian analyzed over 100 draft policies looking for trends in what’s included and what’s not.
Policy Language. In many cases, the draft policies contain the following clauses:
- Prohibit indemnification of executive officers. Consistent with the listing Exchange Rules, almost all the clawback policies prohibit indemnifying a covered executive against recoupment of erroneously awarded payments. Meridian found that some policies also contain a prohibition on “(i) reimbursement or payment of premiums for insurance that covers recouped compensation and /or (ii) an increase in an affected officer’s compensation to cover recouped compensation.” These expressed prohibitions reinforce the SEC’s guidance that an officer’s pay may not be modified to offset the recouped compensation.
- Company reimbursement of recoupment costs. A provision allowing the company to seek reimbursement for legal fees and related recoupment effort expenses may be instrumental for former executive offers to cooperate with repaying the incentive amount expeditiously.
- Non-exhaustive list of potential recovery vehicles. Such a clause specifically provides the company with the sole discretion to determine the timing and method of recovering excess compensation. Sample language is provided in the article.
- Internal administrative procedures for preparing an Accounting Restatement in the event of a clawback scenario. While only a handful of companies have incorporated this into the policy, it is an area that will require thoughtful consideration by management to ensure clear roles, duties and process workflows.
- Acknowledgement clause. About half of the policies reviewed required executives to sign an acknowledgement of the company’s adopted policy, even if the provision indicates that the clawback is enforceable without an acknowledgement. This is an area that should be discussed with legal counsel.
Lastly, a few companies added a Committee indemnification clause for Board Directors and officers even though this is typically covered through corporate bylaws. Specifically doing so is perceived to provide “some incremental protection, even if only to reaffirm the coverage of existing indemnity clauses.”
What else? In addition to amending the policy document, there are a number of action items that need to be taken. Shearman & Sterling provide a list of what companies should be doing now, including reviewing charters, executive officer determinations, tracking incentive pay to covered executives, and preparing filings.
