Executive clawbacks for misconduct 'very tricky thing to do'

A handful of Canadian companies are following a growing U.S. trend and giving their boards the power to claw back executive bonuses, options and even pensions if they discover after the fact that the executives have fiddled with financial results.

New policies for reimbursement of incentive compensation are appearing in proxy circulars this year at companies such as Nortel Networks Corp. and Brookfield Asset Management Inc., but it is still unclear how much clout these new strings on executive pay really have.

Indeed, one of the country's leading advocates for investor interests says the new clawback policies could prove to have no claws at all.

"It's a tough thing to do," said David Beatty, managing director of the Canadian Coalition for Good Governance, which represents institutional investors. The coalition has recommended for some time that companies include such clawback measures, but Mr. Beatty said unlike U.S investor groups, it has not been actively promoting the policy.

"Theoretically, I think it is a good idea, but practically speaking, I think it is a very tricky thing to do."

Robert Harding, chairman of Brookfield Asset Management, which approved a clawback policy this February, said the move was made because of its significant U.S. shareholder base.

Brookfield's policy states that in the case of "a significant restatement of financial results," the chief executive officer and the chief financial officer may be required to pay the corporation "an amount equal to some or all of any bonus or other incentive-based or equity-based compensation."

Members of the management committee also may be required to pay back incentive payments up to two years after their departure if they are involved in actions that hurt the company, such as soliciting clients or employees, disclosing confidential information or making inappropriate or defamatory comments about it.

Mr. Harding said the new measures are not the result of a request from shareholders or a specific experience. He said the board took its lead from other major U.S. companies with similar policies such as Microsoft Corp., American Express Co. and General Motors Corp.

As for their effectiveness, he said only time will tell.

"I think the real test would be if you had to go after someone. It will depend on the circumstances at the time. This is all new. We will learn as we go -- hopefully not by experience."

One Canadian company with some high-profile experience in this matter is Nortel, which is currently suing 10 executives, including former CEO Frank Dunn, over "return to profitability" bonuses that were given out on results that a later restatement showed were not profitable at all. Mr. Dunn has countersued the company.

The new "recoupment" policy at Nortel applies to all directors, senior executives and other insiders in cases involving "intentional misconduct that contributes, directly or indirectly, to an error in financial information that materially affects the value of such incentive compensation."

It was adopted in January.

Ken Hugessen, a Toronto-based executive compensation consultant, figures about one-third of U.S. companies will have similar measures in place this year, largely because of mounting shareholder pressure that has been fuelled by a series of compensation and accounting scandals.

"There have been so many problems in the U.S. There is much more angst in the shareholder community about executive compensation and particularly about making a lot of money based on misinformation," he said. "This is one of those things that is definitely on the rise."

But Mr. Beatty at the coalition said in the end other measures may be more effective. He points to holding periods on shares for departing employees as a move that can accomplish some of the same things. Canadian Imperial Bank of Commerce has found another solution and now delays bonuses and stock awards for its CEO for a year. CIBC also has a clawback policy for the CEO's pension if there are "material negative restatements" of financial results that surface after retirement for the time he was the leader.