Compensation Clawbacks Report

DragonGC’s latest report sheds light on the evolving landscape of compensation clawback policies among S&P 500 companies. This comprehensive study, which analyzed 401 companies that filed independent clawback policy disclosures within the past 12 months (for period ended May 7, 2024), reveals a significant trend: a majority of these companies are not only meeting but exceeding the SEC’s requirements. This proactive approach underscores a commitment to enhanced corporate governance and accountability.

Key Findings:

1. Widespread Adoption Beyond Compliance:

DragonGC’s analysis shows that over 70% of the S&P 500 companies have implemented compensation clawback policies that go beyond the SEC’s basic mandates. This indicates a strong inclination towards mitigating risks associated with executive compensation and ensuring accountability. For instance, 51.4% of these companies address breaches of company policies or legal requirements, while 48.6% specifically target breaches of fiduciary duty or fraud.

2. Diverse and Comprehensive Clawback Triggers:

The report identifies six prevalent triggers for compensation recoupment that extend beyond financial restatements:

• Inappropriate Conduct: 20% of companies have policies that recoup compensation for actions deemed harmful or inappropriate. For example, Hartford’s “Misconduct Rule” enables recoupment in cases of detrimental actions.
• Breaches of Company Policies or Legal Requirements: Policies in 51.4% of companies address willful breaches causing significant harm, aligning with SEC and NYSE standards. Notable examples include Church Dwight Co and Avalon Bay.
• Breaches of Fiduciary Duty or Fraud: With 48.6% adoption, companies like Moderna recoup compensation due to material dishonesty or fraud.
• Misconduct with Reputational or Financial Harm: 32.9% of companies, including American Airlines and US Bancorp, have policies targeting misconduct that harms the company’s reputation or finances.
• Administrative Enforcement: 28.9% of companies, such as Carmax and Eli Lilly, allow administrators to enforce compensation recovery.
• Termination or Criminal Resolutions: 23.9% of companies, like Yum Brands and American Water Works, include crimes committed by executives as triggers for recoupment.

3. Alignment with Key Voting Influencers:

The majority of these policies are in line with recommendations from ISS, Glass Lewis, and BlackRock. These guidelines stress broad executive accountability, ensuring that misconduct affecting financial and reputational integrity is addressed. The policies prioritize enforceability, transparency, and robust governance, which are critical for maintaining investor confidence.

4. Customization and Discretion in Policy Implementation:

DragonGC’s findings show that companies exhibit varying degrees of specificity in their clawback triggers, allowing for tailored approaches that fit their unique governance frameworks. This discretion is vital for reclaiming compensation in scenarios reflecting poorly on the company or highlighting failures of executive duties. Companies like Moderna, which include breaches in their definition of “Detrimental Conduct,” exemplify this tailored approach.

5. Benchmarking Against Peers:

For companies drafting or revising their compensation clawback policies, benchmarking against industry leaders is essential. DragonGC’s report provides invaluable insights into how leading firms structure their policies. Understanding these trends can help companies align their policies with best practices and regulatory expectations, thereby enhancing governance and mitigating risks.

Conclusion:

DragonGC’s findings highlight a proactive approach among leading companies to not only comply with regulatory expectations but to set higher standards for corporate accountability. These insights are crucial for issuers to benchmark their policies and stay ahead in the evolving landscape of corporate governance.