Last year I did a blog entry looking at the limitations of Sarbanes-Oxley when it comes to clawing back cash bonuses and stock awards from executives whose fraud or misdeeds had resulted in a disastrous financial restatement.

Now, J. Mark Poerio and Crescent A. Moran from the law firm Paul, Hastings, Janofsky & Walker say companies don't have a choice but to develop clawback policies.

With institutional investors pushing for restatement clawbacks, with the Securities and Exchange Commission identifying them as an item requiring special proxy statement disclosure, and with big corporations like Bristol-Myers Squibb, Citigroup, Eastman Kodak, General Motors and Monsanto already establishing these policies, the pressure is mounting.

Their piece They Can't take It With Them says these sorts of policies would stand as a "carefully focused deterrent".

"The adoption of some form of restatement clawback policy is practically a no-brainer, because there is simply no defending the retention of bonuses or stock awards by executives whose fraud or misconduct causes a financial restatement," they write.

The writers set out the areas directors need to consider and remind them to be careful with documentation. Absolutely critical if the matter ends up in court.

Also, they warn directors to carefully consider who should be subject to the policy. Bear in mind that Section 304 of Sarbanes-Oxley applies to the company's CEO and CFO. But it would make sense to design a policy that would also apply to other individuals who have the job of ensuring the accuracy of the company's books.

There is also the issue of what to do when designing a policy that is retroactive. The problem there is that would require the written consent of the executive who is placing past compensation at risk. The authors explain how to go about it.

And despite the limitations of Sarbanes-Oxley, companies really don't have a choice, they say.

"The failure to take any action in early 2007 most likely will lead to fiduciary regret - and to possible recriminations, because the SEC's new disclosure requirements will highlight the absence of such action,'' they write. "Those regrets and recriminations will certainly be heightened if the absence of a restatement clawback policy permits executives to retain incentive awards despite their own fraud or misconduct causing a financial restatement."