New SEC Release Revives Complex Issue of Clawbacks

By Alexandra R. Lajoux


Regulation Securities and Exchange Commission Clawback Online Article

Should public companies be required to disclose their policies for paying incentives based on reported financial results, including policies for retrieving such pay if results are restated? And in the case of restatement for any reason—including not only fraud but also error—should a company be required to “claw back” excess pay awarded in the years prior to the restatement? What about retrieving incentive pay awarded based on other measures, such as stock price performance or leadership?

These are not simple questions, so it’s good that the US Securities and Exchange Commission (SEC) has reopened comments on its originally proposed rule on the recovery of erroneously awarded compensation—also known as clawbacks—a rule that has been on the back burner since the proposal was first published in 2015, as noted in this new SEC fact sheet

When the SEC first proposed this rule, the agency received more than 60 responses, including a detailed comment from NACD calling the rule and its massive release (which span 198 pages asking 115 questions) a “solution to a non-problem.” Most companies already have clawback policies, restatements for error are rare, and clawbacks for fraud are already required under Sarbanes-Oxley. We also noted that not all incentive plans span three years, and we strongly disagreed with clawbacks of incentive pay based on stock price performance. Finally, we said that boards should have discretion on whether and when to claw back pay.

The six years since we wrote that letter have not changed our views. Therefore, NACD welcomes the reopening of the comment period. Members are encouraged to submit their own views—especially when there have been crickets in response to the SEC’s recent outreach.

So far, the SEC has not seen any direct responses to its request for feedback. A week after publishing a release, the SEC put out a notice on October 21 with a 30-day comment period. These two announcements have generated just a dozen new responses so far—most of them short, anti-corporate rants lacking reference to the rule itself.

The only response of any substance was not a comment on the rule, but rather the submission of a March 2021 article by Sanjai Bhagat and Charles M. Elson titled “Why Executive Compensation Clawbacks Don’t Work.” Another important communication was a request for an extended comment period submitted by Davis Polk and Wardwell and signed by 40 law firms.

Given the letter from the legal community, the SEC is likely to extend the comment period another 30 days (to December 21, 2021) to find out what corporations, their representatives, and their owners have to say.

The NACD position on the matter can be boiled down to the conclusion to our original comment: “The real challenge is how to create and maintain long-term company value that can reward employees at every level, from hourly workers to senior executives, as well as provide a return to the shareholders who invest in them.”

Alexandra R. Lajoux
Alexandra Reed Lajoux, Ph.D., M.B.A., is a founding principal of Capital Expert Services, LLC (CapEx). She serves NACD as chief knowledge officer emeritus.