I read this interesting piece on the NYTimes.com today, “Pushing Back on Clawbacks” which describes how D&O insurers are now offering protection against a clawback. The companies argue that “the policies don’t undermine financial reforms because they don’t cover fraud or intentional wrongdoing.” Sure, you could have made that argument a few years ago when SOX was the only financial reform in town, but not anymore.
Dodd-Frank’s clawback provision (Sec. 954) is specifically aimed at faultless mistakes: whenever a reporting company issues an accounting restatement, it clawsback the compensation awarded in error. Compare this to SOX Sec. 304, which requires misconduct and claws back all all incentive-based compensation, and you can see how Dodd-Frank is both broader (no misconduct required!) yet also narrower (just the difference between what you got and what you should have got).
Sec. 954 was intended to force directors and officers to think longer term than before. Its goal is to prevent perfectly legal methods of goosing short-term profits (and thus bonuses tied to them or share prices) at the expense of long term growth potential.
Federal regulators have not yet issued rules on Sec. 954, but they intend to during the first half of the coming year. They will also address the new executive compensation disclosure requirements, which includes a requirement to disclose the company policy on hedging against incentive based compensation. I would be shocked if the SEC does not include clawback insurance as an example of “hedging.” But I wouldn’t be surprised if it allows companies to continue to take out these insurance policies, leaving the matter to shareholders to vote on with their say-on-pay votes.