The Securities and Exchange Commission voted Wednesday to adopt a new rule that would require public companies to take back executive compensation when their financial statements contain errors.
These “clawback” requirements are intended to hold corporate executives financially accountable for any reporting errors, whether they are the result of fraud or simple accounting mistakes.
The rule was mandated by Congress as part of the 2010 Dodd-Frank Act in response to the last financial crisis, but it faced resistance from corporate leaders and Republican lawmakers, delaying implementation. Last year, SEC Chair Gary Gensler revived the initiative as part of his larger crackdown on corporate misconduct.
SEC commissioners voted to approve the rule 3-2 Wednesday, with all the Democrats approving the plan and Republicans dissenting.
“I believe that these rules, if adopted, would strengthen the transparency and quality of corporate financial statements, investor confidence in those statements, and the accountability of corporate executives to investors,” Gensler wrote in a statement ahead of the vote.
Leaders of large companies often receive the vast majority of their pay from performance-based bonuses. If companies report strong revenue and profits, they’re paid more. So errors in preparing financial statements can have a big impact on executive compensation.
“Whether such inaccuracies are due to fraud, error, or any other factor, today’s rules would implement procedures that require issuers to recover erroneously-rewarded pay, a process known as a ‘clawback,’” Gensler wrote.
The SEC’s two Republican commissioners, Hester Peirce and Mark Uyeda, voted against the rule, and called it “overly broad.”