Eric van Gils
It has long been debated whether current executive compensation models drive short-term thinking and how do we best align compensation policies with the long-term company strategy and objectives.
How do we ensure executives are thinking further ahead than the next bonus cycle?
With the recent corporate failures, a term being debated amongst remuneration specialists and compensation committees is compensation “clawbacks”, with many hoping this is a tool to drive and incentive ideal executive performance. A clawback policy essentially creates an obligation for an executive to repay amounts to the company should it come to light that they did not perform effectively in their role as an executive.
The recent 2018 PWC Executive Directors Practices and Remuneration Trends Report explores the use of clawback provisions in punishing directors after an event or being a deterrent that discourages questionable actions.
The three events identified by PWC where a clawback could be triggered would include :
A material misstatement of the financial statements of a group company – deliberate or not.
(Gross) misconduct, fraud or dishonesty, or material breach of obligations to the company. This includes adverse legal and/or findings by a court or regulator against the company in which the executive is found to have culpability.
Group or business unit suffers a material failure in risk management.
In its most recent financial results, Naspers disclosed a change in its remuneration policy, allowing the remuneration committee to claw back incentives for certain executives for two years following their payment in the case of material misstatement or gross misconduct on the part of the individual.
Unfortunately, the clawback only relates to the first 2 events proposed by PWC and the executives are not held accountable for a failure in risk management.
An additional requirement in their remuneration policy is that the CEO needs to hold Naspers shares to the value of 10 times his/her annual salary. Shareholders need to ask if the board considered the effect this would have on attracting a future CEO who may not have the ability to acquire the required shares?
Steinhoff had no clawback clauses although apparently Dutch laws could allow shareholders to claim back remuneration paid in certain circumstances. With investigations continuing it is still too soon to assess whether the issues which date back several years could have been avoided through a clawback policy.
The way forward in South Africa
Clawbacks will continue to be debated and we should expect to see an increasing number of local businesses adding these to their remuneration policies (Standard Bank is expected to announce a clawback clause in their 2018 policy).
We still have some time to go before we see how effective these clauses would be in South Africa. The courts would need to test these clauses in terms of the South African labour laws and we’ll need a larger number of companies to take action against executives in claiming back pay.
In a world where shareholders continue to value accountability, and where the focus is increasingly on the fairness of executive compensation, we can expect clawbacks to become more of a norm in South Africa. Whether the clawback policy solves all poor performance issues (or short-term focused decisions) is still to be seen.