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Recovering Value from Executives: Malus and Clawback in the case of Thomas Cook

01/10/2019

At a glance

At an estimated £100m cost to taxpayers for repatriation, and 9000 lost jobs in the UK, it is inevitable that questions are raised about executive pay at Thomas Cook. The business secretary Andrea Leadsom was clear in her letter to the Official Receiver the need to investigate not only the conduct of directors immediately prior to and at insolvency, but also whether any action by directors had caused detriment to creditors or to the pension schemes. The public intuitively understands the need to investigate directors’ actions in the months or even years leading to insolvency, to determine if any of them contributed to the downfall of such a large, long-standing company. If so, it is often called for that well-paid executives repay parts of their substantial remuneration. Legal provisions do exist to facilitate this, in the form of malus and clawback.

Malus permits the company to reduce the value of all or part of deferred remuneration before it has vested, if, for example, subsequent performance targets are not reached or there is a risk management failure.

Clawback provisions allow recovery of the variable components of executive incentive awards, normally where the performance of the business is later found to be worse than initially reported, or where there has been serious misconduct which means that the award is no longer justified.

The FCA and PRA handbooks provide that financial services firms must incorporate malus and clawback in the remuneration policies of senior individuals. For listed companies, the Investment Association’s Principles of Remuneration (Section A, Para 4), as well as the Corporate Governance Code (Provision 37), state that share plans should include the provisions. The Investment Association advises that provisions are drafted to clearly indicate when malus or clawback is triggered and when the remuneration committee will exercise their discretion to apply it.

Malus and clawback were included in Thomas Cook’s remuneration policy across all incentive plans in 2017. The remuneration policy was improved in the financial year 2017 to ensure long term incentives including the Performance Share Plan (PSP) and Strategic Share Incentive Plan (SSIP) had a five year time horizon in line with corporate governance guidelines. For PSP’s specifically, the time period was three years during which subsequent performance was measured before the shares would vest if targets were reached. A two year holding period would follow this. Reflecting this, PSP shares allocated to the CEO in 2015 lapsed in 2018 as performance targets were not met in 2016 and 2017.

The provisions in the Thomas Cook remuneration policy specify that malus can be applied in the event of:

  • a material adverse misstatement or misrepresentation of the Company’s or any Group member’s financial statements;
  • gross misconduct or conduct which resulted in significant losses, as determined by the Committee, and/or;
  • the Company having suffered serious reputational damage or financial downturn, as determined by the Committee, as a result of any action (or in the case of awards under the new PSP or SSIP, any action or omission) taken.

Salary, pension and benefits are not subject to clawback.

Given the lack of recent unvested shares allocated, and the fact that any shares that were vested are now worthless, it may be unlikely these provisions will be helpful in recovering funds. Even if there was significant value to clawback or apply malus to, the circumstances (above) that give rise to such action can be difficult to prove.

The most important part of malus and clawback provisions may be how they are drafted; specifically, what and how they can be triggered. Investors, company management, and the public can easily appreciate that the careful drafting of such provisions will align remuneration policies with risk-taking.

(This article was written by our Employment Trainee Sylvia Mueller.)

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