May 13, 2024
Proxy Perks Disclosures: SEC Enforcement Still On the Beat
Executive personal jet use is back in the news. The WSJ recently reported on the difference between the value of personal jet use reported in companies’ proxy statements versus the actual cost to the companies:
Under federal securities rules, companies must report as compensation the “aggregate incremental cost” of perquisites such as free personal flights. Most say they count expenses directly tied to a specific trip, including fuel, landing fees, airport taxes, catering, crew lodging and meals, and an hourly rate for maintenance, plus the cost of repositioning empty aircraft for later use, securities filings show. […]
Typically left out: fixed costs that don’t change by flying more, including pilot salaries, insurance and the cost of acquiring the aircraft. Companies say they would pay these costs anyway, because the aircraft are primarily used for business. Charter companies charge customers thousands of dollars an hour to fly on similar jets, fees set to cover both the incremental costs reported by the executives’ employers as well as fixed costs—and a margin for profit. The result: a gulf between what executives save by taking personal flights in the company jet and what companies report spending on the trips.
In the meantime, this Morgan Lewis blog post highlights that the SEC continues to focus on perks disclosure—in particular, executive use of corporate jets. In enforcement actions from 2020 to 2023, the violations stemmed from the issues below. Keep these in mind as you consider whether and how to improve your controls:
– Improper internal disclosure and financial reporting controls
– Executives’ failure to provide the necessary information (most commonly in response to directors and officers (D&O) questionnaires) to enable companies to identify and properly disclose perquisites
– Lack of an adequate company process to determine whether executive flights were perquisites that should be disclosed
– Failure to appropriately train employees in the roles responsible for making the determination of whether items were perquisites
– Lack of a formal company policy regarding approval and use of noncommercial aircraft and aviation expense reimbursement, including one case where the lack of a formal reimbursement policy resulted in the CEO being responsible for approving his own expenses
For more resources, also check out the Perks & Other Personal Benefits Chapter of the “Executive Compensation Disclosure Treatise.” We also have two podcasts on this complicated issue featuring Brad Goldberg of Cooley and Stewart Lapayowker of Lapayowker Jet Counsel.
– Meredith Ervine