This article has been updated with corrections since it first appeared.
Mylan, the generic and specialty pharmaceutical maker, last week agreed to consider a shareholder proposal that could expand the company’s ability to recoup incentive pay from its senior executives. Boards may want to monitor shareholder sentiment regarding clawbacks to determine if similar changes in policy would be prudent.
At its annual shareholder meeting on June 21, shareholders supported a proposal by the United Auto Workers Retiree Medical Benefits Trust asking that incentive pay of senior executives be clawed back if “there has been misconduct resulting in a material violation of law or Mylan policy that causes significant financial or reputational harm to Mylan, and the senior executive committed the misconduct or failed in his or her responsibility to manage or monitor conduct or risks.” The proposal was treated as a non-voting discussion item and after debate. a majority of shareholders indicated their support for the measure on their proxy cards.
The company’s current policy regarding recouping incentive compensation covers “specified misconduct that causes Mylan to materially restate its financial statements.” Mylan has not agreed to change its clawback policy or implement a new one.
The support for the UAW proposal is non-binding, and will be considered with the discretion of the board and its compensation committee. The company’s proxy statement states, “The Compensation Committee and the board will take into account the outcome of this vote when considering future compensation arrangements for Mylan’s executive officers.”
The support for this clawback proposal represents a growing demand among shareholders for more corporate accountability. Shareholders remember Mylan’s EpiPen auto-injector pricing scandal in 2016, and are now concerned about lawsuits that may evolve from investigations into the Opioid crisis. As a result, Mylan’s corporate directors could be under greater pressure to recoup or deny the incentive pay of senior executives if misconduct or criminal behavior hurts the company’s bottom line.
Most companies have clawback provisions that are triggered when there is a financial restatement or revision of performance metrics the incentive pay was based on. Expect more companies to expand the circumstances that will trigger a clawback, similar to what Mylan is considering. The changes suggested in the UAW proposal are in line with recommendations offered by Glass Lewis in its 2019 Proxy Paper Guidelines.
Other companies may want to consider updating their clawback policies before their shareholders present them with shareholder proposals. As a result of its success, it’s now possible that any companies the United Auto Workers Retiree Medical Benefits Trust invests in could see a similar shareholder proposal on clawbacks as early as next year.
In an environment where stakeholders are seeking greater corporate accountability, boards may consider reviewing or enhancing their code of ethics to make sure the entire company is on the same page regarding clawback provisions and the circumstances that may trigger them. The board will need to be in agreement on how discretion will be used when enforcing clawbacks, and those may not be easy negotiations. The board will also need to determine how it will respond if shareholders do not agree with its “discretionary” decisions regarding clawbacks. Greater engagement with shareholders will help find solutions for each individual company.
Corrections: The UAW proposal was presented as a “non-voting discussion item” at the Mylan annual meeting, not a “shareholder resolution” and shareholders indicated support for the measure on proxy cards rather than by a vote. Mylan did not change its clawback policy nor implemented a new one after its annual meeting.
