The Advisors' Blog

– Broc Romanek, CompensationStandards.com

In this opinion piece by Bethany McLean (to whom I have professed a crush), she tackles “lack of perk” disclosures and the unusual circumstance of “it’s highly unusual to have a corporate jet based where the directors are and not where the executives are”:

Men’s apparel retailer Jos. A. Bank may be best known for its incessant advertisements of all the merchandise it has on sale. “Could they advertise more? Could they sell less?” quipped Jerry Seinfeld. “We’ll give you three suits for $8! Just take it! Get it out of here!”

So in a twisted kind of way, it’s perfect that the company and its chairman of the board, Robert Wildrick, have recently pulled off a different kind of super sale. In March, competitor Men’s Wearhouse agreed to buy Jos. A. Bank — for $65 a share, about a 55 percent premium to its share price last fall. Wildrick served as the chief executive officer until 2008, and is often given credit for growing the business from a struggling retailer into a national brand. He now has a consulting agreement with the company that pays him $825,000 a year, and has earned over $200,000 a year in his role as chairman.

Seinfeld might be surprised to hear it, but there is a piece of merchandise that Jos. A. Bank doesn’t advertise. According to Federal Aviation Administration records, Jos. A. Bank leases a private plane, and not just any private plane — a high-end Dassault Falcon 2000EX. A reader of Jos. A. Bank’s financial statements would almost certainly not be aware of the existence of the plane.

What’s interesting is that despite all the furor about corporate jets, and the complaints about executive compensation, experts say this situation is not uncommon. “It’s entirely possible that a company could have a jet and not have it be disclosed in the proxy statements,” said Andrew Liazos, a partner at law firm McDermott Will and Emery, who heads the firm’s executive compensation group. Indeed, Jos. A. Bank is a perfect example of how a company can thread the needle of the disclosure rules about jets — without breaking any laws.

Jos. A. Bank’s plane is not identified in the company’s financial statements. I searched its proxy statements and 10Ks going back to 2003 for the terms “jet,” “personal use,” “aircraft,” and “airplane,” and found nothing related to this aircraft. And this is technically proper — if the plane is being used entirely for business purposes. If its executives or directors are allowed personal use, and that use exceeds a certain dollar value, it must be disclosed in the proxy statement. According to the SEC, a company is required to report as “’All Other Compensation’ perquisites and personal benefits if the total amount exceeds $10,000, and to identify each such item by type, regardless of the amount.” It wouldn’t take much flying on a Falcon 2000EX for the benefit to exceed $10,000. According to Jos. A. Bank spokesman Tom Davies, its plane is used entirely for business purposes, so no disclosure is necessary.

But here’s where things get a little more contorted. Jos. A. Bank is headquartered in Hampstead, Maryland. Yet the jet’s lease says the jet is hangared in West Palm Beach, Florida — which is where board chairman Wildrick lives. The company’s director of aviation, Jeff Michlowitz, also lives in Florida, according to property records. A now-expired advertisement for a second pilot included in its job description “some weekend flying and occasional Sunday relocations” and read “MUST LIVE WITHIN 1 HOUR FROM PALM BEACH INTERNATIONAL AIRPORT.”

If the chief executive officer of a company — which Wildrick was until 2008 — were using a jet to commute from home to the office, that would qualify as personal use. (According to the FAA, the first payment on the lease was due in May 2004.) In such circumstances, the jet should have been disclosed. Aha!

Yet a 2001 amendment to Wildrick’s employment agreement established “additional executive offices at a location in the Palm Beach, Florida metropolitan area” and specifically allowed Wildrick to “conduct the affairs of the company from the Palm Beach office.” Given that, the travel between Florida and the company’s Hampstead, Maryland headquarters would be considered a business expense, and wouldn’t have had to have been disclosed — even when he was CEO. Now that he’s a director, travel between Palm Beach and Hampstead would still qualify as business use.

This strikes some corporate governance experts as odd. “It’s highly unusual to have a corporate jet based where the directors are, and not where the executives are,” says Lynn Turner, the former chief accountant of the SEC, and a former board member at both public companies and institutional investors. “It would be significant information for the investors in that company.” It also seems strange that a company would have a jet that was just for the use of the chairman of the board.

But Michlowitz, the company’s director of aviation, says the plane is not just for Wildrick’s use. He says that other executives also use the plane to visit the stores and scout out new real estate. He adds that Wildrick barely uses it at all anymore. Asked why, given those circumstances, the plane is still kept in Palm Beach, he responds that inclement weather and increased difficulty of maintenance at facilities near cold, snowy Hampstead make Palm Beach a sensible decision. He adds that the other executives fly commercially down to Palm Beach, and then use the plane from there. He also reiterated Davies’ point, which is that the plane is used entirely for business.

Putting all this aside, doesn’t the cost of a plane still have to show up somewhere in the financial statements? Well, yes, sort of. Many corporate aircraft are leased, rather than owned, and Davies confirms that this is the case with Jos. A. Bank’s plane. Since the plane is classified as an operating lease, the payments are a form of off-balance-sheet financing — which must be disclosed, according to the SEC, albeit not in granular enough detail to tell that they are for a plane.

In its financial statements for the year ending in January 2005, Jos. A. Bank says that its “principal commitments are non-cancelable operating leases in connection with its retail stores, certain tailoring spaces, and equipment.” The plane, according to Davies, is part of that “equipment.” Would you ever have guessed?

At the time of that first lease payment, Jos. A. Bank’s stock was selling for about $13 per share. In fiscal 2004, the company’s net income was just $24.5 million — less than the $24 million price of the plane! Back then, and even before the sale to Men’s Wearhouse, shareholders might have wanted to understand what benefit they were getting from the use of the plane. But given the deal — which means that anyone who bought at the time the company got its jet has just about quadrupled her money — it would be hard to find a shareholder who would complain now. (Calls to two Men’s Wearhouse spokespeople were not returned.)

Maybe the larger question is this: Would Jerry Seinfeld still call what Jos. A. Bank is selling “cr*p” if he knew it included a Falcon 2000EX?