Air (On the Side of Caution) Directive: Business Jet “Perk” Disclosure Audits


Executive AirShare Phenoms

With a large number of SEC-reporting companies considering renewing and/or expanding their business jet fleets (especially following recent changes to US tax laws), many compensation committees would be well advised to seek independent legal counsel to audit business jet and other “perk”-related SEC disclosures on a privileged basis. A recent SEC enforcement action against The Dow Chemical Company illustrates why.

By: Paul Jebely, Jonathan Ocker, and Jessica Lutrin of Pillsbury Winthrop Shaw Pittman.


SEC-reporting companies must put into place appropriate control procedures and continually monitor business jet and other “perks” provided to executives in order to ensure that a correct standard of disclosure is adopted. In advance of the 2019 proxy season, SEC-reporting companies should engage legal counsel to review their perk disclosure in their proxy statements on a privileged basis. They should also have a “perk” checklist to determine, among other things, the following items:

• Reportable incremental costs for SEC purposes and how they differ from the tax rules;
• Business flights versus personal flights versus commuting;
• How to establish and maintain accurate jet logs;
• Business versus personal security; and
• Director perks.

SEC Enforcement Action

On July 2, 2018, The Dow Chemical Company (“Dow”) agreed to settle charges related to its failure to adequately disclose and identify its Chief Executive Officer’s perks in its proxy statements. Specifically, from 2011 through 2015, and in proxy statements reporting on those years, Dow understated its CEO’s perks by approximately $3 million of additional compensation for club memberships, limited use of personal assistant office time, travel to outside board meetings, sporting events and personal activities (including use of the Dow aircraft), and membership fees to sit on the board of a charitable organization.

In finding that Dow had included inadequate perk disclosure in its proxy statements, the SEC held that Dow disregarded the SEC’s standard for determining whether an item is a perk or other personal benefit (i.e., an item with a business purpose is a perk or other personal benefit where it is not integrally and directly related to the performance by the executive of his or her duties). Instead, Dow applied a business purpose standard, which the SEC considered but decided not to adopt when it issued the proxy disclosure rules in 2006. Under the SEC standard, the existence of a business purpose related to the CEO’s job that supports a corporate tax deduction is insufficient to determine that the benefits were not perks that required disclosure in its proxy statements. Some examples of benefits that may be deductible for tax purposes but treated as perks or other personal benefits for proxy reporting purposes include (i) home security or security while on a personal trip for a CEO, (ii) travel expenses by a CEO to attend board meetings of other companies, (iii) exercise equipment/executive physicals, and (iv) club memberships.

Dow agreed to settle the charges by paying a civil penalty in the amount of $1.75 million, hiring an independent consultant to evaluate and recommend changes to Dow’s policies and procedures relating to perk disclosure, and implementing such changes.

Independent Consultant Review

As part of the settlement, Dow agreed to hire an independent consultant to conduct a review of, prepare a written report on, and make recommendations regarding its policies, procedures, controls, and training relating to the evaluation of whether payments and other expense reimbursements should be disclosed as perks under securities laws. The report must be provided to Dow and the SEC.

Dow is not required to implement any recommendation that it considers to be unnecessary, unduly burdensome, impractical, or costly. However, Dow must propose in writing an alternative policy, procedure, or system designed to achieve the same objective or purpose.