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Enforcing Accurate Financial Reporting — Clawbacks

July 6, 2015

The Securities and Exchange Commission (SEC) recently proposed a set of rules that would govern the clawback provisions of listed companies.

Some quick notes:

  • These standards would apply specifically to compensation that is linked to accounting-related metrics, stock price and total shareholder return.

  • Any excess executive compensation over the previous three fiscal years as a result of financial misstatement will be required to be recovered, regardless of fault.

  • If the company decides to forego the clawback provision for an executive, disclosure of the amount of excess compensation and the reasoning behind waiving the provision will be required.

  • Companies that fail to comply with these new regulations can be subject to delisting.

The overall impact of this announcement, though, would appear to be limited. Many companies have prepared for this situation ever since the Dodd-Frank Act in 2010 mandated a clawback provision in executive compensation contracts, with over 80% of companies in the Fortune 100 having some form of this program in place. These policies seem more tailor made to deal with situations involving accounting fraud, as was the case with Saba Software. Whatever the case may be, we will continue to monitor this situation closely as it will directly influence future disclosures and drive discussions regarding effective corporate governance.

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