CII supports reopening of Commission’s clawback proposal

By Joanne Cursinella, J.D.

The Council of Institutional Investors expressed support for the SEC’s proposal to reopen, for a second time, the comment period for listing standards for recovery of erroneously awarded compensation (the June release) in a June 24, 2022 letter to the Commission. The CII noted and commented specifically on three issues identified in a memorandum of the SEC’s Division of Economic and Risk Analysis regarding the June release (the DERA memo), an increase in voluntary adoption of compensation recovery policies by issuers, the number of additional restatements that would trigger a compensation recovery analysis, and potential implications for the costs and benefits of the proposed rule.

Voluntary adoption of compensation recovery policies. CII generally agrees with the DERA Memo data and analysis that many companies have voluntarily adopted compensation recovery provisions since the 2015 proposing release and this may reduce the anticipated benefits and mitigate the anticipated costs of the proposed rules. This finding, however, does not diminish in any way CII’s strong support for the issuance of a final rule. In fact, CII said that is agrees with SEC Chair Gary Gensler that a final rule, as described and supplemented, would strengthen the transparency and quality of corporate financial statements and accountability of corporate executives to their investors.

Additional restatements that would trigger a compensation recovery analysis. CII generally agrees with the DERA memo’s finding that “if the final rules were to encompass both [“little r” and “Big R”] types of restatements, it would increase the total number of restatements that could potentially trigger a compensation recovery analysis that may result in recovery.” But this finding is not surprising to CII and the organization continues to believe that encompassing both types of restatements in the final rule is not only consistent with the intent of Section 954 of Dodd-Frank but increases the benefits to investors that would result from the issuance of a final rule.

Further, in addition to being inconsistent with the intent of Section 954, CII believes it would be harmful to investors and the capital markets for the SEC to narrowly limit the required clawback policy to exclude little r restatements. CII believes excluding little r restatements from the required clawback policy would serve to reduce transparency to investors, but, more importantly, according to CII, limit the ability of the required clawback policy to recover for shareowners the executive pay that was unearned and erroneously awarded.

Potential implications for costs and benefits. CII generally agrees with DERA memo findings regarding potential implications for the cost and benefits of the proposed rule as a result of the increase in the number of companies with voluntarily adopted compensation recovery provisions since 2015. Those findings were that:

• The benefits of the proposed rules, including increased incentives to improve financial reporting and business practices, as well as costs of incentive-based compensation, may be reduced if companies have already adopted strong compensation recovery provisions;
• The cost of the proposed rules and potential shifts in executive compensation would likewise be mitigated under such circumstances; and
• To the extent that companies are already disclosing information about voluntarily adopted recovery policies, the benefits and costs from the proposed disclosure requirements may be mitigated.

And CII also generally agrees with the DERA memo findings regarding potential implications for the cost and benefits of the proposed rule as a result of the inclusion of “little r” restatements:

• To the extent that companies may recover additional erroneously awarded compensation with the inclusion of little r restatements, the company may benefit from the availability of those additional funds, and the implementation costs associated with those recoveries may also increase.
• The inclusion of little r restatements might increase the benefits associated with incentives for high quality financial reporting, and incentives for value-enhancing business practices; and
• That the inclusion of little r’ restatements may also increase the benefits and costs associated with potential shifts in managerial compensation.

CII believes that on the whole, the potential implications for the costs and benefits of the proposed rule as a result of the increase in the number of companies with voluntarily adopted compensation recovery provisions since 2015, and inclusion of “little r” restatements as put forth earlier provides a net benefit to investors and the capital markets and further supports the organization’s view that the Commission should promptly issue this rule.