Carillion and the “failure” of clawback
The collapse of Carillion has raised many issues relating to public procurement, the actions of the board and the role of the auditors. But a press release by the Institute of Directors suggesting that in 2016 Carillion relaxed the clawback conditions that applied to bonuses has raised questions over remuneration governance. The change seems to have removed “corporate failure” as a clawback/malus event, substituting conditions so that pay could only be clawed back in the event of a mis-statement of financial results or gross misconduct of an individual (neither of which may be triggered in this case).
No doubt the reasons for the change and the extent to which it was, or wasn’t, flagged up to shareholders when they overwhelmingly approved the revised remuneration policy at the 2017 AGM will be looked at very carefully. However, this also gives a timely focus on clawback given the FRC’s current consultation on changes to the UK Corporate Governance Code (the “Code”), which we previously blogged about here.
The concept of “clawback”, and its close cousin “malus”, were introduced following the banking crisis of 2008 as part of the remuneration code which applies to banks. This requires banks to include clawback and malus provisions in their variable pay plans (i.e. both bonus and share plans) and sets out the minimum circumstances in which clawback and malus should apply. Clawback involves requiring an individual to repay amounts they have received while malus applies to variable pay that has been “earned” but not yet paid out, and enables a company to reduce or cancel it. It is worth noting that the banking remuneration code only includes corporate failure (described as “a material downturn in financial performance”) as a malus event and not a clawback event – so even if Carillion was a bank, it would not have been required to include corporate failure as a clawback trigger.
The Code applies to all listed companies (and not just banks) and has included clawback and malus on variable pay since 2014. However, unlike the banking remuneration code, the Code does not specify minimum circumstances in which clawback and malus should apply. This position has been retained in the draft Codepublished as part of the FRC’s consultation. Instead, companies have discretion to decide which events should (and, as Carillion highlights, should not) trigger clawback and malus clauses.
Perhaps the collapse of Carillion suggests that this discretionary approach should be revisited? Should the Code specify minimum clawback and malus events, in the same way as the banking remuneration code? Perhaps the FRC will go further and adopt Carillion’s ill-fated “corporate failure” wording? This would set a bar below which executives were always at risk of clawback and/or malus, and may assist in giving both shareholders and the wider public confidence that remuneration plans will not “reward failure”. And while this would limit a company’s discretion, it is hard to see why shareholders or remuneration committees would want bonuses to potentially escape clawback and malus where a company fails so spectacularly.