This video can be viewed at the below link.[1]

If a CEO’s pay is based on the financial performance of a company, wouldn’t you expect that the company’s numbers—their financial statements—to be accurate?

In today’s economy, corporate executives often are paid based on how the companies they lead perform: things like revenues, profits of the business that you’re investing in.

But what happens, if the numbers the companies use to calculate such incentive-based compensation aren’t accurate? In some cases, companies may have to go back and revise or restate prior financial reporting.

As a result, an executive may have been paid for hitting certain milestones that the company actually didn’t hit.

Well, about 11 years ago, Congress decided this didn’t make sense.

Congress took up this issue as part of many reforms after the financial crisis embedded in what was called the Dodd-Frank Act.

Congress said this: if a company has to revise its financial statements, the executives should have to give back any of the incentive-based pay that they didn’t really earn.

This is called a “clawback.”

It makes sense that executives shouldn’t benefit from incorrect numbers.

Congress then tasked those of us at the Securities and Exchange Commission with implementing a rule—a clawbacks rule.

Today, we issued a proposal to move forward with this work.  It is now out for public comment, so please go to sec.gov and let us know what you think.

I believe implementing a clawback rule will strengthen the transparency and quality of corporate financial statements, but also the accountability of corporate executives to you, the investing public.  

Whether the numbers were faulty due to fraud or simple mistakes, I think this clawback rule would give executives an even stronger incentive to check their companies’ numbers.

That’s good for investors.