Tapestry Alert: Carillion Liquidation – Clawback in the News

This month has seen another major company, Carillion, enter into liquidation. The CEO and CFO have exited the business. This corporate failure and their exits have drawn attention to poor incentive practices and brought their remuneration committee under significant criticism from investors who are calling for the executives’ incentives to be clawed-back. At this time of year, many companies are finalising the terms of their bonus and long-term incentive awards. Are there any lessons to be learnt from the criticisms being raised against the Carillion remuneration practice?

Investors are calling for the company to clawback £millions that have been paid to the CEO and CFO. One of the criticisms raised is that the outgoing CFO last year was paid a bonus and was paid it in cash when it should have been paid in shares. There was also relaxation in the clawback terms.

Roger Barker, Head of Corporate Governance at the UK’s Institute of Directors, has been reported as saying that the liquidation suggested a lack of effective governance, commenting that:

There are some worrying signs. The relaxation of clawback conditions for their executive bonuses in 2016 appears in retrospect to be highly inappropriate. It does no good to the reputation of UK business when top managers appear to benefit in spite of the collapse of the organisations that they are responsible for.

Tapestry Comment
Companies do not plan to fail, but when they do it brings a spotlight on the remuneration decisions taken by the remuneration committees in those companies. We are seeing a number of firms changing their plans and policies in relation to malus and clawback:

  1. Some are amending their plans to allow or require bonuses to outgoing senior executives to be satisfied partly or fully in shares so that if the company later fails or falters they suffer along with shareholders.
  2. We are also seeing more robust and extensive malus and clawback provisions being used. For the last 3 years, we have produced a report covering the use of malus and clawback in the FTSE 100. We have seen over the 3 years more companies having malus and clawback on both bonus and LTIP awards and a broadening of the triggers for their use. 3 years ago quite a number of the companies in the review applied either malus or clawback and had financial misstatement as a trigger. There are very few companies in our review with the minimum level of malus/clawback terms. We are sure the Carillion failure, will prompt some companies to review their triggers to make sure they are fit for purpose. Copies of our 2017 FTSE 100 malus and clawback report are available for clients by contacting us.
  3. Some companies only apply their malus and clawback terms to their executive directors, increasingly we are seeing them being applied to all recipients of their executive incentives.
  4. Companies are also ensuring their malus and clawback terms are enforceable around the world. A number of our clients have enforced their malus and clawback.

If you would like to discuss whether changes should be considered for your bonus and/or LTIPs or your Malus and Clawback provisions in light of the recent criticisms against the Carillion remuneration arrangements or if you have any questions, please do get in touch. We would be pleased to be of help.

 Janet and Matthew

Janet Cooper

Matthew Hunter

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