U.S. companies forced to correct accounting failures would have to reclaim a portion of bonuses awarded to corporate bosses under a rule set to be proposed Wednesday by the Securities and Exchange Commission.
The SEC measure, required by the Dodd-Frank Act, would expand the circumstances under which executives could be punished if their firms restate past earnings. Companies would have to claw back stock or cash bonuses based on erroneous results even if it wasn’t intentional, a change that could affect hundreds of companies annually.
The change would build on rules -- approved more than a decade ago in response to fraud at Enron Corp. and WorldCom Inc. -- that permitted clawbacks only when it could be shown that books were cooked intentionally.
“Calling for a clawback in the absence of wrongdoing is a fairly significant departure from the historical ways of thinking about this,” said Michael Young, a partner at Willkie Farr & Gallagher who defends companies in accounting-related disputes. “It’s understandable if some executives view it as pretty strong medicine.”
Companies restated financial results 831 times in 2014, according to an April report by Audit Analytics. About 42 percent of the restatements took a bite out of the company’s bottom line, according to the report. The others didn’t affect the company’s earnings but required correcting balances for shareholders’ equity, cash flow or other accounts.
The SEC proposal also would cover a wider group than the earlier rules, which applied only to chief executive officers and chief financial officers. The new plan would claw back pay from any executive involved in preparing erroneous figures, including a firm’s top accounting officer and vice presidents in charge of functions such as sales, administration or finance, according to an SEC fact sheet released Wednesday.
Companies that don’t adopt clawback policies could have their shares delisted by stock exchanges, the SEC said. More than 85 percent of companies in the S&P 500 Index already have clawback policies more stringent than existing SEC standards, said Carol Bowie, director of research at Institutional Shareholder Services.
“Once the rule gets adopted, I think you will see even more companies adopting them and some even going back and revising their existing clawback policy,” Bowie said.
JPMorgan Chase & Co. two years ago clawed back more than $100 million in pay from managers who oversaw a $6.2 billion trading loss. The bank said it invoked its own clawback policy in taking back pay previously granted to executives responsible for what came to be know as the London Whale trades.