July 18, 2018

The recent $1.75 million fine imposed by the U.S. Securities and Exchange Commission (SEC) on Dow Chemical Company should serve as a reminder to public companies that operate business aircraft to review their executives’ perquisite (perk) disclosure policies and procedures, said Scott O’Brien, NBAA’s senior director, government affairs.

The SEC’s cease-and-desist order notes that “from 2011 through 2015, and in proxy statements reporting on those years, Dow did not ensure that approximately $3 million in executive perquisites were adequately evaluated and disclosed as ‘other compensation’ in the Compensation Discussion & Analysis (“CD&A”) section of the annual proxy statements. These authorized but undisclosed perquisites included personal use of the Dow aircraft and other expenses.” Read the SEC’s full statement.

“Publicly available information on the case indicates some flights made by Dow’s chief executive were authorized by the company, but not properly disclosed for SEC purposes,” O’Brien said.

“In general, public companies must determine the value of a perk provided to certain executives based on its aggregate incremental cost (AIC) to the company,” he added. “This must be reported as ‘other compensation’ in the company’s proxy statement.”

In its order, the SEC noted that “an item is not a perquisite or personal benefit if it is integrally and directly related to the performance of the executive’s duties. Otherwise an item is a perquisite or personal benefit if it confers a direct or indirect benefit that has a personal aspect without regard to whether it may be provided for some business reason or for the convenience of the company, unless it is generally available on a nondiscriminatory basis to all employees. Instead, Dow incorrectly applied a standard whereby a business purpose related to the executive’s job was sufficient to determine that a benefit would not be a perquisite that required disclosure.”

NBAA Tax Committee member Alan Goldstein noted that the SEC reporting guidelines apply only to a public company’s chief executive officer, chief financial officer, and the three most highly compensated executive officers other than the CEO and CFO.

“These are called the ‘named executive officers,’ or ‘NEOs,’ ” said Goldstein, who also cautioned companies about keeping excellent records, especially when it comes to calculating the AIC. “This means meticulous record-keeping for any flights that may be for the executive’s personal use, and includes such information as expenditures for any extra fuel, crew, landing fee, maintenance and repair, etc.”

As noted in the SEC’s enforcement proceeding, the company “applied a standard whereby a business purpose would be sufficient to determine that a benefit was not a perquisite that required disclosure. As a result, Dow did not satisfy the Commission’s regulations and guidance.” The SEC also found that Dow did not adequately train employees in key roles to ensure that the proper standard was applied for perquisites disclosure, and had inadequate processes and procedures to ensure proper reporting of perquisites. The company has agreed to hire an independent consultant to review the company’s executive perk disclosure procedures.

“We encourage our members to review their procedures and policies on how they are calculating and reporting their aggregate incremental costs,” said O’Brien. “Companies also need to be clear on what types of flights they are reporting.”

NBAA’s Tax, Regulatory & Risk Management Conference, planned for Oct. 14-15 in Orlando, FL, will provide additional content on SEC disclosures and non-business use of aircraft. Learn more about the conference.