Mylan’s Toughened Clawback Policy: Will Others Follow?

Expect more companies to expand the circumstances that will trigger a clawback

Mylan, the generic and specialty pharmaceutical maker, last week agreed to a shareholder resolution that expands 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.” Shareholders showed strong support for the proposal—315.7 million shares were voted for and 40.6 million shares against.

Previously, the company’s policy regarding recouping incentive compensation covered “specified misconduct that causes Mylan to materially restate its financial statements.”

The new clawback policy is non-binding, and will be exercised with the discretion of the board and its compensation committee. Additionally, 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 are 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 has done. The changes adopted by Mylan 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.