Interpreting Dodd-Frank Section 954: A Case for Corporate Discretion in Clawback Policies

Abstract

This Note presents the author’s original empirical study of the clawback policies of large public companies, and uses the study’s findings to help interpret Section 954 of the Dodd-Frank Act.  A clawback policy is an agreement between a company and its employee, made when the company pays the employee, stating that if certain events take place in the future, the company can recoup some or all of that compensation.  Section 954 requires publicly traded companies to develop and implement clawback policies that apply against executive officers, reach incentive compensation, and are triggered by accounting restatements.  The study presented in this Note reveals that companies value the discretion to determine when and how to exercise their clawback powers.  Accordingly, if regulators interpret Section 954 in a manner that strips companies of all such discretion, companies will face a powerful incentive to turn to compensation arrangements that are not governed by Section 954.  This Note argues that to avoid this result, regulators should interpret Section 954 in a manner that gives companies limited discretion to determine on a case-by-case basis whether to exercise their clawback powers.