Beware clawbacks
Clawback provisions will be used to justify even more generous bonuses
The next big thing in the unctuous world of executive remuneration looks set to be the clawback provision. These provisions are not entirely new to SA but to date have had limited application.
In essence a clawback provision allows a company to get back some of the huge bonuses paid to executives for overseeing comparatively strong profit growth, if it subsequently turns out that there hasn’t been such strong profit growth. It is surprisingly easy for this to happen; accounting is after all more an art form than a science.
The highest-profile addition to the list of SA clawback users is Naspers, which reveals in its 2018 remuneration report that the incentive plans of the top executives will include a clawback provision. It would allow the remuneration committee a period of two years to claw back part or all of the incentive paid in a particular year, which sounds reasonable enough until you read the circumstances in which it would be allowed — “in the event of material financial misstatement or gross misconduct on the part of the individual”. That is boilerplate stuff.
Good luck trying to prove a particular executive was involved in the “material financial misstatement” or was guilty of “gross misconduct”, whatever that might be. Even UK banks struggled to get back any of the bonuses dished out to their executives as they created the bubble that caused the 2008 global financial crash. Getting money back from an executive is like trying to get a springbok out of the jaws of a ravenous lion — which is why it almost never happens.
The thing is that by the time a company is trying to claw back a bonus, it’s too late. There’s a good chance the relationship between the executive and the company has broken down.
This means there’s no reason why the executive, who may have contravened all that corporate governance guff about ethical behaviour, would not use a portion of his bonus to pay lawyers to prevent the company from getting its hands on any of it. We’re not talking petty cash or even 13th-cheque generosity here — bonuses frequently triple the value of an already hefty basic remuneration package.
And while the UK banks struggled, you would think the Steinhoff executives had already volunteered repayment. Each one who presented evidence before parliament last year was emphatic that he knew nothing about what was really going on in the company. Surely that is sufficient justification for repaying a bonus? Apparently not. The company’s nonurgent, noncommittal response on the matter is that it is “giving consideration to reclaiming bonuses paid in the past to certain senior executives”.
But here’s the thing. Clawback bonuses are going to be used to justify even more generous bonus payments. Every remuneration report will tell shareholders: “Yes, that does seem like an eye-watering bonus, but it’s all right because we’ve put in a clawback provision.”
If you see this you must not only vote against the remuneration policy and the reappointment of every member of the remuneration committee, you must do whatever is necessary to get the consultants fired.
Then get your evidently dim-witted board to consider a bonus structure that would obviate the need for a clawback and pay out seven to 10 years after the event, allowing time to test financial statements’ veracity.
If you see this you must not only vote against the remuneration policy and committee but get the consultants fired