July 2, 2019

Setting the right “tone at the top” – How to avoid the pursuit of clawback provisions

Regulators around the world, have exhorted companies to improve their “tone at the top”, as a requirement for governance.
In March of 2019, Hertz filed complaints against its former top management, seeking recovery from damages caused due to necessary financial restatements. The complaints made, raise interesting questions regarding the responsibilities of corporate officers and the consequences if they fail to satisfy those requirements and at what point attributes of an effective management team that drives their employees in the service of shareholder value, crosses the line. Related questions include:

Regulators around the world, have exhorted companies to improve their “tone at the top”, as a requirement for governance.
In March of 2019, Hertz filed complaints against its former top management, seeking recovery from damages caused due to necessary financial restatements. The complaints made, raise interesting questions regarding the responsibilities of corporate officers and the consequences if they fail to satisfy those requirements and at what point attributes of an effective management team that drives their employees in the service of shareholder value, crosses the line. Related questions include:

1. Does an officer have a duty to set a particular “tone at the top”?
2. To the extent that such a duty exists, what is the source of that duty and what is its content?
3. How does the nature of that duty compare, for example, to the duties of care for directors?
4. Does failure to satisfy that duty amount to gross negligence as a matter of contract?
5. Does the duty vary between different officers and does a general counsel’s duty include the obligation to report to the board on “tone at the top”?
6. What obligations in turn, does the board have with regard to “tone at the top”?

This recent case has re-ignited discussions around the feasibility and implementation of clawbacks. Now the question remains, as to how to best implement such clauses?