The following post comes to us from Michael W. Peregrine, Partner at McDermott Will & Emery, Andrew C. Liazos, head of McDermott’s executive compensation practice, and Timothy J. Cotter, Managing Director at Sullivan, Cotter, and Associates, Inc. 

Governing boards should consider compliance-based incentive compensation as a supplement to statutorily mandated “clawback” provisions, and as an alternative to more aggressive proposals to recoup past compensation from “culpable” executives.  The general counsel is well situated to support the board in any evaluation of compensation-based executive accountability policies.

There is much public discourse concerning the function of clawback clauses, their structure, and their limitations.  Much of this discourse is prompted by recent corporate scandals and associated calls for executive accountability.[1]  But there are other reasons.  There is extensive discussion in anticipation of rulemaking from the Securities and Exchange Commission that is required under Dodd Frank Section 954.[2]  Notable governance commentators and shareholder advocates are encouraging boards to adopt clawback policies that go beyond the statutory requirements.[3]  Major public companies are adopting their own versions of clawback policies,[4] including some who are doing so at the behest of investors.[5]  In addition, the boards of large, financially sophisticated nonprofit corporations are considering clawback policies as a demonstration of corporate responsibility.[6]  Indeed, how best to establish a “clawback” policy continues to be a hot topic!

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