Why be selfish about them? After all, if you didn’t earn the bonus, you should give it back.
As our research has shown over the past 18 months, most companies have adopted what we call fraud-related clawback provisions that echo Section 304 of the Sarbanes-Oxley Act in their applicability. In other words, the only employees required to pay back compensation based on misstated financials are those directly responsible for the fraud.
In our latest analysis, "Updated Analysis of Clawback Policies," available in our online store, that makes distinction the number of fraud-based clawback provisions outpaced performance-based provisions (those that applied to all executives receiving incentives that were based on misstated financials regardless of direct responsibility) by 13 percentage points. The situation would not appear to have changed significantly when we did another count of clawback provisions in October this year in our report titled, "2009 Governance Practices Series: Clawbacks," where the progress on companies introducing clawback provisions was proceeding at a snail’s pace.
Perhaps companies are simply holding fire, since, according to Senator Dodd’s proposed “Restoring American Financial Stability Act of 2009” even most companies that have already introduced a clawback provision will have to rewrite it. Dodd’s provisions indicate that:
Each issuer shall develop and implement a policy providing that, in the event that the issuer is required to prepare an accounting restatement due to the material noncompliance of the issuer with any financial reporting requirement under the securities laws, the issuer will recover from any current or former executive officer of the issuer who received incentive-based compensation (including stock options awarded as compensation) during the 3-year period preceding the date on which the issuer is required to prepare an accounting restatement based on the erroneous data, in excess of what would have been paid to the executive officer under the accounting restatement.
This touts the mandatory introduction of a performance-based provision – best practice that we have been promoting since June of 2008, when we first released our groundbreaking analysis, "2008 Proxy Season Foresights #11: Clawback Policies". If bonuses were paid out or option profits made based on a state of the business that did not reflect reality, then they were incorrectly paid out whether the executive was personally responsible for the fraud or not. All shareholders suffer from a restatement; therefore all executives who benefited from misstated accounts should see their incentives adjusted to reflect actual achievements.
This is not mere churlishness, it is common sense. It’s not just common sense, it’s ethical. In the same way that finding a wallet full of cash on the ground that was dropped by a mugger means that we should hand it in to the nearest police station rather than keep it for ourselves just because it wasn’t us who stole it.
Paul Hodgson — Senior Research Associate
