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Just doing it (maybe) at Nike …

Add Nike (NKE) to the growing list of companies that have adopted formal policies letting them claw back executive pay if things go badly wrong. And add it to the almost equally long list of those whose clawback policies risk being meaningless, either because they’re too narrow or too vague.

At Nike, the new policy is laid out in an exhibit to the 8-K the company filed late yesterday. To kick in, the company must first and foremost have restated its financials “due to the material noncompliance of the Company with any financial reporting requirement.”

In addition, the board must make a determination of “Misconduct,” defined as “willful commission of an act of fraud or dishonesty or recklessness in the performance of a person’s duties” — and conclude that the misconduct “contributed to the noncompliance which resulted in the obligation to restate.”

At that point, the board “may require” repayment of “all or part of” any bonus, long-term incentive pay, and even certain gains on option exercises — at least, to the extent they were base on the financial statements that were subsequently restated (or, in the case of option or stock-sale gains, made between the original financial mis-statement and the restatements).

That leaves the board with plenty of discretion, which is at once understandable and problematic. Recoupment, after all, is a tricky thing for corporate boards. If their policies are too broad and discretionary, it leaves open the risk that they’re never used. Ditto if the policies are too narrow.

Then there’s the whole question of due process — one of the bedrock principles of American society, and thus part of the fabric of corporate governance in this country as well. Rigid clawbacks would not only risk being unfair, they would invite lawsuits — we imagine boards would be pretty skittish about demanding repayment absent some real indication of culpability.

But how likely is a board to make that determination alone, pronouncing an executive guilty of willfully committing “an act of fraud or dishonesty or recklessness” without some outside (ideally judicial) confirmation of that conclusion? Trying to go it alone would probably give your average general counsel conniptions.

And so in the end, the language in Nike’s policy (and others we’ve seen) reminds us of the old definitions of dismissal “for cause,” which pretty much took a felony conviction or civil judgment of liability against the misbehaving executive to apply. And by that point, chances are pretty good the board would have sent him packing long before, paying him off under “involuntary termination without cause” provisions.

So we applaud Nike for adopting the policy; it’s a step in the right direction. We’ll have to wait to see how this policy, and others, actually work out when push comes to shove.

Image source: bobosh_t via Flickr

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