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Statement on Listing Standards for Recovery of Erroneously Awarded Compensation

Oct. 26, 2022

Today, the Commission adopts a rule that implements a key Congressional mandate under Section 954 of the Dodd-Frank Act: requiring public companies to recover incentive-based compensation that is erroneously paid to executives if the company restates its financial statements due to material errors.

To be clear: this is money that the executive was not entitled to, and would not have received, if the financial statements had been prepared accurately.

This rule is about fundamental fairness and integrity: Congress’ intent was for shareholders to avoid costly litigation to recoup unearned executive compensation, preserving funds that, from a shareholder’s perspective, could be put to more productive uses.

As I noted when the Commission voted on the Pay versus Performance rule this past September, a key factor driving the 2008 global financial crisis was the stark misalignment of incentives that led executives to take excessive, catastrophic risks.

In my previous role as a congressional staffer, I had a front row view of the fallout from this reckless behavior on the financial futures of working families. The result? Trillions of dollars of avoidable losses in household wealth; taxpayer-funded bailouts to the tune of hundreds of billions of dollars; millions of foreclosures; and a substantial loss of confidence in our markets.

This gap in corporate governance guardrails particularly harmed long-term investors like pension funds and working families saving for retirement. Those choosing to invest in their long-term financial security are more likely to bear the costs of reckless actions by executives that temporarily increase share prices in the short-term but that lead to accounting restatements in the longer-run. To decrease the risk of these disruptions, Congress directed the Commission to adopt today’s rule.

The rule will ensure that executives are incentivized to produce high quality, accurate financial statements, which investors rely on to make informed investment decisions.

Some have indicated that the rise in voluntary clawback agreements in recent years makes this rule unnecessary. To me, this trend makes the case for the rule even more compelling. Currently, there is significant variation in the types of clawback agreements used by issuers. By providing for standardized criteria, the rule gives investors greater assurances that all issuers face similar incentives to produce quality financial statements.

The rule also prevents the abuse of a potential loophole by incorporating what are referred to as “little r” restatements. "Little r" restatements correct errors immaterial to previously issued financial statements but that later become material to future reporting. Empirical evidence suggests that managers may try to use the discretion built into accounting standards to re-classify “Big R” restatements to “little r” restatements.

These types of restatements have made up an increasingly high share of all financial restatements in recent years. The final rule appropriately incorporates both “Big R” and “little r” restatements, ensuring that executives do not have an incentive to opportunistically classify material errors.

I’m pleased to support the final adoption of today’s rule. I would like to thank all of the Commission staff, and particularly staff in the Division of Corporation Finance, who worked so diligently to craft this thoughtful rule that will reduce incentives to engage in excessive risk-taking, provide investors with more confidence in board oversight of executive management, and promote financial stability.

[US Securities and Exchange Commission]