Companies Going Above and Beyond Clawback Requirements

When it comes to compensation clawbacks, many corporate executives are discovering their own employers have even stricter standards than required by the federal government.

In an analysis of 2024 proxy filings, consulting firm FW Cook found that large companies tend to have provisions for recouping executive compensation that exceed the rules put in place by the Securities and Exchange Commission. Those rules took effect in January 2024, but it looks like many of the major companies subject to them were way ahead of the regulatory agency. The survey included 45 companies with market capitalizations greater than $10 billion, and FW Cook determined that 80% of those companies maintained expanded clawback policies.

The SEC compensation clawback rules took their final form in October 2022 after first showing up in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. In 2015, the Obama administration proposed rules for taking back incentive-based compensation that was awarded erroneously. Seven years passed before the SEC finally adopted them, in effect imparting guidelines for companies to create their own clawback policies. Among the guidelines, companies are required to disclose their clawback rules and report instances in which they take effect.

Importantly, the SEC says clawback policies must apply in cases of intentional misconduct and minor errors. That covers both “little r” revisions of financial statements and “big R” reissuances of corporate financials.

But what do more stringent clawback policies look like? First, FW Cook found that two-thirds of companies surveyed subject a larger population of executives to the clawback policies than required by SEC’s rules. About two-thirds of the companies included in the study also apply their clawback policies to a range of compensation beyond the incentive-based measures laid out by the SEC. And many companies don’t even require financial restatements to trigger clawbacks – issues such as misconduct or violating company policy may suffice.

In practice, in recent years some high-profile corporations have enacted massive clawbacks in response to their leaders’ bad behavior. For example, fast-food purveyor McDonald’s secured the return of $105 million from former CEO Steve Easterbrook in response to allegations he committed fraud to cover up inappropriate sexual relationships with company employees during his tenure at the company. BP took back more than $40 million in compensation from ex-chief executive Bernard Looney after his dismissal in 2023 when the oil company concluded he misled the board of directors about personal relationships with colleagues.

If FW Cook’s study is accurate, more companies will end up following the leads of McDonald’s and BP. In fact, of the companies surveyed by FW Cook that don’t already have tougher clawback policies than required, many indicated they plan to beef up their provisions soon. At least one recent case shows why that is probably a smart move.

Earlier this year, China-based Cloopen Group Holding received no civil penalties from an SEC investigation into accounting fraud at the cloud communications company. Cloopen’s remedial measures included clawing back nearly $230,000 in bonus money paid to its CEO and CFO. The SEC cited the remedial measures as part of the rationale in forgoing further penalties against the company.

In other words, from a risk-management standpoint, it can pay off to proactively take pay back from executives.