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Jun 10, 2024

Most large companies exceeding SEC requirements on clawback policies

More than 50 percent have triggers for breaches of company policy or legal requirements

Most S&P 500 companies are going beyond SEC requirements for their executive compensation clawback policies, according to research from DragonGC.

New SEC rules came into effect last year under which national securities exchanges now require listed companies to adopt a policy ensuring companies will recover incentive-based compensation erroneously received by current or former executive officers after an accounting restatement. Issuers must disclose these policies in annual reports released after December 2023.

DragonGC analyzed the clawback policies of the 401 S&P 500 companies that had made disclosures as of early May. The firm finds that most policies include non-restatement-related clawback triggers – which the SEC does not require – and that companies are also including restatement-related triggers beyond what the SEC demands.

The analysis finds that 51.4 percent of companies in the sample have clawback triggers for breaches of company policy or legal requirements. The second-most common trigger, adopted by 48.6 percent of companies in the study, is breaches of fiduciary duty or fraud. These are followed by:

  • Misconduct with reputational or financial harm (32.9 percent of companies)
  • Administrative enforcement (28.9 percent)
  • Termination or criminal resolutions (23.9 percent)
  • Inappropriate conduct (20 percent).

The analysis also shows that 43.9 percent of companies’ policies include between one and three compensation clawback triggers beyond those required. Twenty-seven percent have between four and six non-required triggers, according to the study.

Michael Weiksner, co-founder and chief technology officer of DragonGC, tells Governance Intelligence there has been a large expansion of clawback policies due to the SEC’s new rule but also due to pressure from large investors and proxy advisers.

‘These clawback policies follow ISS, Glass Lewis and BlackRock’s recommendations, stressing broad executive accountability, encompassing misconduct affecting financial and reputational integrity,’ the DragonGC report states.

‘They prioritize enforceability, transparency and robust governance. Trigger specifics vary among organizations and are detailed in their clawback policies, granting the company discretion to reclaim compensation in situations reflecting poorly on the company or indicating failures of the executive officers to fulfill their duties responsibly.’

Weiksner adds that shareholder activism has also played a role. ‘It’s often pretty hard to argue against having a clawback trigger if an executive committed a crime,’ he says.

Companies are very interested, at this early stage of complying with the rule, in what their peers are doing, Weiksner notes. They have choices to make about how far they go with their policies but, he says: ‘This is a challenge you can address head on.’

Ben Maiden

Ben Maiden is the editor-at-large of Governance Intelligence, an IR Media publication, having joined the company in December 2016. He is based in New York. Ben was previously managing editor of Compliance Reporter, covering regulatory and compliance...