Tougher ‘clawback’ on the way? Australian companies may become subject to more stringent “clawback” expectations

UK developments indicate that Australian listed company remuneration committees should probably prepare for more stringent “clawback” expectations. These go beyond the proposed new ASX Corporate Governance Principles and Recommendations introduction of what that document calls “clawback” disclosures.

But before we go any further, let us be clear that what politicians have popularized as “clawback” is a misnomer. True “clawback” is the recovery of remuneration that has vested to the employee. That is, they have to pay it back. This is how it is understood in the boardrooms and regulators in every other country other than, it seems, Australia. Clawback is not the forfeiture of unvested remuneration. This is known as a “malus”.

Already this reporting season, a number of companies have voluntarily disclosed provision to forfeit unvested executive rewards in the event of financial misstatement, malfeasance or fraud. Such “malus” arrangements contrast with true “clawback” in the form of recovery of remuneration that has vested to the employee. For a host of practical, legal, and other technical reasons, effecting a “clawback” policy is fraught with difficulty.

Nevertheless, the trend towards implementing true clawback has begun. In the US, the Sarbanes Oxley Act requires companies to clawback remuneration in defined circumstances. The UK’s Financial Conduct Authority (“FCA”), which is the UK’s equivalent to APRA, has published a consultation paper on the implementation of the new Capital Requirements Directive (“CRD IV”) in the UK, which addresses implementation of the remuneration provisions (see HERE). The new Remuneration Code (as amended for CRD IV) includes a requirement for firms to operate “clawback” arrangements, rather than just malus arrangements as currently. Another new requirement is for the malus and clawback provisions to apply to all variable remuneration, and not just deferred variable remuneration.

While the proposed UK legislation will apply to larger financial services companies, the practices it introduces can be expected to gradually spread to non-regulated sectors, just as STI deferral and forfeiture has spread from APRA regulated Australian banks and insurers to other companies. For example, the only Australian company so far to introduce clawback is dual-listed Rio Tinto. The UK legislation will also impact the financial services operations of some Australian companies operating in the UK.

While Guerdon Associates will continue to monitor these trends, the remuneration committees of banks, insurers and the larger ASX listed non-financials may be well served to better understand the practical difficulties of such polices in preparation for a possible change in investor expectations and/or regulation following on from the UK.

© Guerdon Associates 2024
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