Cleary Gottlieb partners Alan L. Beller and Arthur H. Kohn recently guided a working group comprised of six major pharmaceutical companies and a coalition of 12 institutional investors in developing industry-setting principles regarding recoupment policies concerning major compliance failures under health care laws.  The working group publicly announced yesterday its successful joint development of a best practices policy. For the full text of the announcement, click here.

The objective of the working group was to develop a set of principles for the industry to reference in implementing compensation clawback policies.  The policies would be designed to hold individuals accountable for unethical and inappropriate behavior and thus deter any negative impacts on long-term shareholder value.  About half of public companies currently have in place some form of clawback policy, as companies wait for the SEC to issue standard rules on clawback policies pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The principles, Principal Elements of a Leading Recoupment Policy, include full discretion of the compensation committee to determine if a material violation of company policy related to the sale, manufacture or marketing of health care services has caused significant financial harm to the company and therefore trigger consideration of a possible recoupment of incentive compensation; application of these principles extending beyond the individuals responsible for the compliance failures to potentially include supervisors who failed to manage or monitor the risk; compensation committee authority to decide whether and when to claw back incentive-based compensation already paid or otherwise recoup compensation that has not yet vested or not yet been paid; and public disclosure concerning decisions to recoup compensation in compliance with SEC rules.