Strictly speaking, “clawback” refers to the requirement to seek repayment of reward that has vested and been released to an executive.
In Australia, the term is often used in reference to the cancellation or lapse of an unvested incentive opportunity for reasons such as the misstatement of financial accounts, or fraud. The accepted term for this type of sanction, however, is “malus”, which was first applied in Europe, but has now been adopted on a global basis as an outcome of financial regulation encouraged by the Financial Stability Board after the GFC (for example, see HERE).
Unfortunately, the mistaken use of the word clawback by politicians and others (perhaps because the word has more political resonance with voters, for example see HERE) to describe malus policies has been difficult to correct . Some Australian listed companies, including five in the ASX 50, have been careful to ensure their polices differentiate between malus and clawback. This may yet prove useful, if changes wrought by regulation for both malus and clawback in the rest of the world spreads here as part of the global convergence of governance practices.
In the UK, the Prudential Regulation Authority confirmed in July that banks would be required to introduce new malus and clawback policies from 1 January 2015 (see HERE). The regulation requires banks to apply malus, and recover incentives paid via clawback, for 7 years from the date of the award, with an extension to 10 years in certain circumstances.
In the US, companies are required to develop and implement policies to “clawback” incentive-based executive compensation that is later shown to have been awarded in error. This requirement applies to all listed companies, not just banks, but is narrower in scope than the UK rules.
The US clawback regulations are about to be updated with a proposal by the US Securities and Exchange Commission (see HERE). Under the proposed rules, national securities exchanges and associations will have to establish listing standards that would require all US listed companies to adopt and comply with a compensation recovery policy. Additionally, recovery would be required from current and former executive officers who received incentive-based compensation during the three fiscal years preceding the date on which the company is required to prepare an accounting restatement to correct a material error.
The proposed US rules define “incentive-based compensation” to include performance-based compensation paid to executives based on a company’s stock price and/or total shareholder return. While approximately 51% of the top US 200 public companies making performance-based grants for executive compensation base it on a total shareholder return measure, a significant proportion will be missed by these rules.
Currently Australian companies are only encouraged by the ASX Corporate Governance Council to disclose a “a summary of the entity’s policies and practices regarding the deferral of performance-based remuneration and the reduction, cancellation or clawback of performance-based remuneration in the event of serious misconduct or a material misstatement in the entity’s financial statements.” (see HERE).
APRA’s remuneration guidelines for regulated ADIs encourage, but do not require, clawback (see HERE).
While there does not currently appear to be further regulation on the Australian horizon, the rising bar of governance expectations, stimulated by overseas practices, may see an increase in the number of local investors expecting formal clawback policies (in the correct sense of the term) over the next few years as a condition for supporting company remuneration reports.
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