SEC Commissioner Kara M. Stein issued a statement supporting the proposed rule that would require “the majority of listed issuers to adopt a recoupment, or clawback, policy for when an executive’s incentive-based pay is based on erroneous financial reports.”
Commissioner Stein declared that this proposed rule would further develop the Dodd-Frank Act’s original attempts to increase executive accountability and refocus executives on long-term results by mandating that “the issuer clawback erroneously or incorrectly awarded compensation.” She stated that the rule would also discourage artificially inflated financial statements by requiring companies to clawback incentive-based executive compensation if there are material errors in its financial statements. Furthermore, the proposal expands the definition of incentive-based pay to include metrics (such as stock price and total shareholder return) that, according to Commissioner Stein, often constitute crucial factors in determining incentive-based pay. Additionally, the proposed rule provides that disclosures be tagged in eXtensible Business Reporting Language (“XBRL”), which Commissioner Stein firmly believes enables more comparability across companies and improves investors’ searches for company information.
In marked contrast, SEC Commissioner Daniel M. Gallagher vehemently refused to recommend the proposed rule. He declared that it was a considerable waste of time and resources. First, he argued that “subjecting a broad swath of executive officers to a no-fault recovery mandate creates the potential for substantial injustice,” especially with no “relief valve,” and casts the corporate board “as the enemy of the shareholder.” Second, he objected to the inclusion of weaker entities unable to bear the cost of compliance such as smaller reporting companies (“SRCs”), emerging growth companies (“EGCs”), foreign private issuers (“FPIs”), and registered investment companies (“RICs”). Finally, he disagreed with basing the required compensation to be clawed back on inconclusive share price metrics such as Total Shareholder Return (“TSR”).
Commissioner Gallagher stated that he could accept a “reasonable clawbacks rule,” but that the unveiled proposed rule is like the “newest Goya, tortured and and nightmarish.”