It seems reasonable enough. If an executive of a company that engages in unethical or illegal conduct has received incentives such as stock options or bonuses, once those actions come to light the executive would be required to return those incentives.
The term for that is “clawback.”
Currently clawback rules apply only to the CEO and CFO of public companies. Many other companies put clawback rules in place for their executives, but soon the Securities and Exchange Commission (SEC) intends to enforce the rules to cover all executives across a company that engages in illegal activity or misconduct.
Clawback rules were specifically addressed in the Dodd-Frank Act. There in “Recovery of Erroneously Awarded Compensation” clawback rules were detailed to target incentive-based compensation, often in the form of stock options, which were received by a former or current executive. The new rules will seek to broaden compliance in this area.
Clawback originally became legislation in the Sarbanes-Oxley Act of 2002. Dodd-Frank gave the SEC more authority to clawback incentives and bonuses.
The same is happening in England where in late June the Financial Conduct Authority (FCA) and the Bank of England Prudential Regulation Authority implemented new rules to target bonuses of bankers, senior managers, and risk managers. In the rules, the FCA says that if regulators find evidence of misconduct executives can have their bonuses clawed back for up to 10 years.
One new SEC proposal on clawback is to require national securities exchanges and associations to “prohibit the listing of any security of an issuer that is not in compliance” with clawback requirements.
Does your company have clawback rules in place for all of its executives? If you don’t, you soon will need to.