Governance Explainer Malus and Clawback

Barely a week of 2024 had passed when Endeavour Mining, the FTSE 100 gold miner, indicated it was considering whether to claw back millions of dollars in bonuses awarded to Sébastien de Montessus, who had just been sacked as chief executive for serious misconduct.

De Montessus was fired over allegations of an irregular payment of $5.9m related to the sale of the Agbaou gold mine in Ivory Coast to Allied Gold, a Canadian rival, in 2021. The money is thought to have been diverted to Burkina Faso.

He had been CEO since 2016 and was the ninth highest-paid chief executive in the FTSE 100 in 2022. His total remuneration in 2022 was $10.8m, $6.4m of which was related to long-term incentive plans (LTIPs) that vest over a three-year performance period. The same amount was awarded to him in LTIPs in 2021.

Full details of the impact of the termination on de Montessus’s remuneration will be disclosed in due course. The board may have the right to reduce or cancel awards under so-called malus and clawback provisions.

If the Endeavour board press ahead with this course of action, he won’t be the only high-profile executive to be hit with a leavers’ penalty recently. Just before Christmas, BP fired Bernard Looney as chief executive without notice after finding that he committed serious misconduct. This meant he will forfeit as much as £32.4mn in bonus, salary, pension allowance and share awards.

What is malus and clawback? 

Malus refers to a financial penalty which results in the reduction of ‘at risk’ remuneration, such as a bonus. ‘Malus’ is essentially a negative ‘bonus’.

Clawback refers to the cancellation of unvested or pending incentives and the recovery of incentives and bonuses that have already been paid.

Both were originally introduced for financial institutions, mainly in response to the financial crash in 2008.  However, they have now become common for LTIPs and executive bonuses in all sectors.  They originally applied in very limited circumstances, such as misstatement of financial results or gross misconduct by the participant, but the range of events which trigger these provisions has been gradually expanding.

What does the Corporate Governance Code say?

The 2024 edition of the UK Corporate Governance Code, which has just been published, states (paragraph 37): “Remuneration schemes …… should also include provisions that would enable the company to recover and/or withhold sums or share awards and specify the circumstances in which it would be appropriate to do so.”

The new Code wording also states that remuneration schemes and policies should permit the use of board discretion to override formulaic outcomes.

This would have helped avoid the situation that arose at the UK housebuilder Persimmon in 2018. The CEO, Jeff Fairburn, was handed pay and bonuses of £85m over a two-year period. It made Mr Fairburn the UK’s highest paid chief executive in 2017, up from £2.1m a year earlier.

The awards were the outcome of an uncapped 2012 long-term incentive plan based on dividend payouts and the company’s share price. However, in 2013, Persimmon’s share price received an unexpected boost from the launch of the government-subsidised Help to Buy equity loan scheme for homebuyers. This generated massive windfalls for Fairburn and his colleagues which could not be overridden as the pay formula was uncapped.

As a consequence of this heavily criticised scheme, the board and remuneration committee chair were replaced, and Mr Fairburn also left the company.

About the author

image of Dr Roger Barker

Dr. Roger Barker

Director of Policy and Corporate Governance, IoD

Dr. Roger Barker is Director of Policy and Governance at the Institute of Directors, and a member of the Management Board. Dr. Barker is the author of numerous books and articles on corporate governance and board effectiveness, including the recent volume: ‘The Law and Governance of Decentralised Business Models: Between Hierarchies and Markets’ (Routledge, 2020). He is a former member of the European Economic and Social Committee and the founder of a successful corporate governance advisory company. A former investment banker, Dr. Barker spent almost 15 years in a variety of equity research and senior management roles at UBS and Bank Vontobel, both in the UK and Switzerland. He has a doctorate from Oxford University and taught politics at Merton College, Oxford (2005-2008).

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