Arrest of BBC exec puts spotlight on clawbacks

A well-known broadcaster beloved by many in the U.K., Huw Edwards fell from grace this year after pleading guilty to accessing indecent images of children. 

And now the BBC says it will attempt to claw back the salary paid to the former star presenter.

Edwards earned an annual salary of about £475,000, and while his employer knew he had been arrested on suspicion of serious offences, it continued employing him for five months, according to the Financial Times.

The board said that Edwards had “pleaded guilty to an appalling crime,” according to the report. “Had he been upfront when asked by the BBC about his arrest, we would never have continued to pay him public money.”

Clawbacks are a common scenario in Canada when it comes to executive agreements, and are increasingly in the spotlight after the U.S. Securities Exchange Commission brought in new mandates at the end of 2023.

Employers are increasingly adopting clawback policies as a proactive measure to enhance internal controls and mitigate risks associated with executive compensation, says Kelly O’Ferrall, partner at Osler in Toronto.

“Companies are scrutinizing their plan terms a little bit more closely these days, and as situations arise that are unfavourable… [it’s about] asking questions about what could have been done to prevent paying someone who engaged in misconduct or who received money they wouldn’t have received otherwise.”

It’s a common-sense approach, says Camille Jovanovic, principal at Hugessen Consulting in Toronto.

"Boards and governance bodies are saying, 'Well, we should really have more of a tool to be able to claw back compensation when people are… behaving badly in a way that's just so egregious or so obvious.”

U.S. changes influence Canadian approach

Clawback policies have gained significant traction in recent years, particularly in the wake of regulatory requirements in the United States.

"The trend towards increasing use of clawback policies has continued, in part, because of evolving U.S. rules," says O’Ferrall.

In 2022, the NYSE and NASDAQ, two of the largest stock exchanges in the world, required companies listed on these exchanges to have clawback policies in place. These policies must comply with specific criteria set forth by the exchanges, leaving little room for companies to deviate from the established guidelines.

As a result, many Canadian companies have followed suit, she says.

"There's actually quite a few Canadian companies… who are also listed on U.S. exchanges. And so we've seen quite a few Canadian issuers implement clawback policies to comply with the U.S. rules."

The instance of having a clawback of some kind is standard practice for most mid- to large-size Canadian issuers, says Jovanovic.

Traditionally, these policies have been designed as "double trigger" clawbacks where two specific conditions must be met: a financial restatement and misconduct that directly caused that restatement.

"[This] creates a pretty narrow set of circumstances in which a clawback would take place," she says.

"A more progressive approach, and this is similar to the new SEC rules in the U.S., is to have a policy that allows for a clawback if there is a restatement, regardless of whether or not there has been misconduct.”

Clawback trigger: financial restatement

When it comes to financial restatement, that can mean a company's financial statements need to be restated, which often triggers a clawback.

This is particularly true in the context of the U.S. regulations, where the requirement for a clawback is often automatic if a restatement occurs, regardless of whether there was any misconduct involved.

 "Where that becomes relevant for compensation is incentive compensation, which is typically paid based on achievement of certain financial objectives, certain financial targets,” says Jovanovic.

"We're now seeing a broadened approach to say, 'Okay, we've messed up our financials, I don't care if you did something wrong or not to cause it, but if we've messed up our financials and you got a bonus on that, we should be able to take some of that back, regardless of if you are acting badly.'"

And, usually, clawback policies are only triggered by restatements caused by error, says O’Ferrall.

“I don't know that the clawback policies typically get into the nitty gritty of how significant the error needs to be, but whether it's the board or other individuals deciding whether to enforce the policy, there may be some discretion there.”

Clawback trigger: misconduct

In non-mandatory clawback policies, misconduct is often a key trigger and can include a range of behaviours that would typically constitute cause for termination of employment, says O’Ferrall, “so, similar types of behaviour like fraud, failure to comply with a code of conduct, or failure to perform one's duties."

The threshold for misconduct in a clawback policy is typically quite high, she says, “to the point where you would probably be thinking about termination for cause; it wouldn't usually include minor behaviour.”

"I see some [policies] that have a list of things that would constitute misconduct and could give rise to a clawback; I see other policies that leave it a bit more open-ended and just use the word 'misconduct,' and then it would be up to the company to defend it later."

The most forward-thinking companies are incorporating misconduct triggers into their clawback policies, says Jovanovic, such as misconduct, reputational harm, risk management failures, and operational failures.

Who is covered by clawback policies?

While many policies are focused on senior executives, particularly those in the C-suite, there is a range, says O’Ferrall.

"If the clawback is embedded into a plan document, it would usually apply to all participants. So, if it was in an option plan or another type of equity compensation arrangement, it would usually apply to everyone who participates in that plan.”

At a minimum, you would see the CEO and CFO included, says Jovanovic.

“The SEC rules have a pretty broad definition of executives, and they do want executives to be covered. So, expanding this to the C-suite or the executive team, however it's defined, would not be uncommon.”

Some organizations will go deeper into the team for certain functional areas that would be relevant for the purposes of financial restatements, she says, such as internal audits, finance or risk.

Types of compensation clawed back

The types of compensation that can be subject to clawback provisions also vary. While it's more common to see policies in long-term incentive plans, which are often tied to the company's financial performance over several years, some policies apply to all forms of compensation, says O’Ferrall.

Also varying is the amount of compensation clawed back, depending on how the policy was drafted. For example, with the U.S. listing standards, the full amount that was erroneously received is clawed back, she says, providing an example: "If you received $500 based on the financial statements that were issued, but you only would have received $100 if those financial statements had been corrected, then $400 gets clawed back."

However, in situations involving misconduct, determining the amount to be clawed back is “tougher,” says O’Ferrall, and there’s more discretion involved.

Lookback periods

And finally, there’s the lookback period, which is the timeframe within which compensation can be reclaimed. Typically, this is about three years, aligning with the SEC's requirements and reflecting what is most common among Canadian companies, says Jovanovic.

“Beyond that, you get into some enforceability challenges.”

And when that lookback starts is another matter, says O’Ferrall

“That's also something that does vary from policy to policy. It can either be X number of years going back from when the issue was discovered, or it can be X years back from the date that the issue actually occurred.”