Personal Use of the Corporate Aircraft, the Super Bowl, and the Need for Additional Disclosure Requirements

There has been a great deal written, including on this Blog, about the use of private aircraft by corporate CEOs.  Corporate aircraft is an expense, often a significant one, and, as a result, ought to be undertaken only if in the interests of the corporation.

The corporate aircraft problem arises at two levels.  First, some companies allow the CEO to use a corporate aircraft when flying on business.  The business justification can run the gammat, but mostly its deemed necessary because the CEO can work on the plane, waste less time in the traveling process, and is easy to reach if something comes up that requires immediate attention.  This does not mean its always justified as in the interests of the corporation but its not a high threshold.

The other issue is the use of the private aircraft, again something that can be expensive, by the CEO (or the CEO's family) for personal travel.  We are not talking about a business trip that may involve a personal excursion.  This issue arises where the CEO has no business motivation but wants to play golf in Palm Springs or read a good book on the beaches in Mexico and opts to fly at the expense of the corporation.  Here companies have a harder time justifying how this is in the best interests of the company. Sometimes they handle the issue by not disclosing the reasons why it is in the best interests of shareholders to allow for personal use of the aircraft.  See, e.g. McCormick & Co. Proxy Statement, Feb. 2009 (noting that personal benefits received by the CEO included "personal use by him and/or his spouse of McCormick’s aircraft at an approximate aggregate incremental cost to McCormick of $43,885").

To the extent they do so, however, they usually justify the behavior by claiming that its necessary for the security and protection of the CEO.  See The Walt Disney Proxy Statement, Jan. 2009 ("The Company pays the cost of security services and equipment for the president and chief executive officer and, in the interest of security, requires the chief executive officer to use corporate aircraft for personal travel.").  But see FORTUNE BRANDS INC, Proxy Statement, Feb. 2009 (noting that the "Company provides named executive officers with limited perquisites [including personal use of aircraft for some of them] that are not provided to other employees in order to be competitive with perquisites provided to executives at other companies."). 

Somehow if the CEO flies to Palm Springs on a traditional airline after purchasing a first class ticket, there's sufficient risk to his or her safety that the CEO should instead fly the corporate aircraft, usually at great cost to the company.  These proxy statements never disclose the analysis employed by the board or explain why other companies in the same industry don't feel the need to adopt the same policy.

With all of that as background, we have learned that the PNC Chairman and Chief Executive Officer Jim Rohr and some clients "took the corporate jet to Tampa to see the Super Bowl".  The reason?  You guessed it. The CEO's security.  As the article noted:

• Mr. Rohr "is required by the board to take the corporate aircraft for all personal and business trips" for security reasons and because he has "a 24/7 job," spokesman Fred Solomon said.

• "The corporate jet reduces his down time...and allows him to travel with clients and other senior leaders so they can meet as they travel," he said.

Mind you, this is a company that has taken federal money and has not been doing very well.

• At year-end, PNC received $7.7 billion in federal assistance to take over hobbled Cleveland-based National City Corp. Last week, PNC reported its first quarterly loss in seven years on costs tied to the merger and said it would cut 5,800 jobs over the next two years.

One suspects that when compensation committees approve this luxury, they are not undertaking a rigorous analysis.  We think that it is time that boards be required to publish the analysis that went into the decision to approve a CEO's use of corporate aircraft for personal use.  In other words, they must explain why the security of the top officer required this.  The analysis should include an explanation as to why a CEO requires the luxury while other CEOs in the same industry do not.  Perhaps, in the imortal words of Justice Brandeis, with the disinfectant of sunlight, they will take the task more seriously. 

Comments

[SkyMachines]

"We never could have done it without these aircraft." -- Sam Walton. Walton was a pilot himself and flew himself and management to stores in Arkansas and Missouri. The company's flight department matured as the company did and now flies middle management, executives, and staff all over the country in a variety of aircraft. Being a cost-efficient company, they don't use them as perks for executives.

The National Business Aircraft Assn. publishes software, Travel$ense, which its members use to evaluate what is the best way to travel for EACH TRIP. For example, if only one person is leaving from a major city and traveling to a major city, and that person doesn't make several hundred dollars per hour in salary, then it will likely recommend the airlines or driving. If several people are traveling, or they are leaving from or visiting remote towns, it may recommend the company plane.

I say, if it's a "perk," then put it in the CEO's salary package, honest and up-front, and let him be taxed on it accordingly. But, if it's a business tool that's used to increase efficiency, then there is nothing wrong with business aircraft. That said, the SIZE of the aircraft matters. Few companies need a $50M intercontinental jet that seats 12 when most trips have 3-4 making several stops 1000 mi. apart and under. Then, a $5M small jet will work, or a $3M turboprop...but that might not assuage the CEO's ego!

[J. Robert Brown]

Marc:

I think your answer a good one and thoughful. My main objection is not to private aircraft for companies but their use for personal travel. As you probably know, officers are taxed something like the cost of a first class ticket for using the jeb for personal reasons (under the IRS rules, it varies with size and distance) while costing the company considerably more than that. If officers had to pay taxes on the incremental cost of the aircraft, they would use it far less often. Alternatively, the board needs to act as a meaningful gate keeper in determining when personal use is truly in the best interests of the company.

Jay

[Gret]

Many companies use the "security issue" for justifying the personal use of business aircraft by their executives. The fact is that earlier this decade, companies and their executives could take advantage of a tax strategy whereby if the company received a report from an independent security consultant claiming security issues, the executive would not have to report the FMV of any personal use flights as taxable income.

Virtually every company with a jet went out and had these studies done. Hence, the catch phrase "we require the CEO to fly on our jet for security reasons" came into being.

Per a compensation expert-

"The application of the transportation--related security rules, particularly with respect to travel on corporate aircraft, can drastically reduce the amount of income that executives must recognize in the case of employer-provided travel benefits. To take advantage of these rules, the non-governmental employer must demonstrate the existence of bona fide business-oriented security concerns with respect to the employees being protected and the implementation and consistent application of an overall security program to protect them. In light of recent events, employers are justified in being concerned about the risk that terrorist activities could pose to the safety of their employees and in establishing appropriate security programs that take such concerns into consideration."