Applying Proposed Clawback Rules

We have previously highlighted (March 2012 Newsletter) the proposed changes to be made by the Government to the Corporations Act 2001 as part of its ongoing reform of executive remuneration. In particular, listed companies will be required to disclose to shareholders through the remuneration report the steps they have taken to clawback bonuses and other remuneration where a material mis-statement has occurred in relation to the company’s financial statements.

In such a situation, if the company has not clawed back any remuneration, the board will be required to provide a detailed explanation to shareholders – an “if not, why not” approach. If the shareholders are unhappy with the company’s actions, they would be able to use their powers under the “two-strikes” rule to vote down the remuneration report and potentially spill the board.

Adopting a proactive approach (prior to formal introduction of the relevant proposed rules), an increasing number of ASX100 companies (including BHP Billiton, Telstra, Brambles and Worley Parsons) now have stated policies in relation to clawback arrangements. In general, clawback is provided for through adjustment of deferred short term incentives (STI) or unvested long term incentives (LTI) (influenced by a prior year’s performance) awarded to executives. Clawback will generally be at the discretion of the board and in the event of material misrepresentation or mis-statement. We understand that many more boards are now considering their position in light of the recent announcement.

We note recent press detailing the clawback of executive remuneration by Swiss bank UBS. Under remuneration rules recently introduced by the company, the board can clawback significant proportions of deferred executive remuneration in the event of financial underperformance. In this particular instance, 171 million Swiss francs ($181 million) in shares and 22 million francs in options were reportedly clawed back from senior bankers. The shares and options were awarded in prior years and were due to vest this year.

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