Disclosure of the Personal Use of Aircraft by Officers and Directors: The SEC and Fiduciary Obligations

In reporting personal use of the aircraft, top officers and directors must disclose the value of the services as part of their executive compensation.  In computing the value, however, they are required to rely on the "variable" costs to the company.  These numbers can be eye popping in amount. 

If the same amount were actually treated as income for IRS purposes, the tax liability would probably result in reduced use of the corporate aircraft.  But in fact the IRS does not require this number to be taken into taxable income.  Taxable income is typically a much smaller amount.  For a post discussing the approach to valuation by the SEC and IRS, go here.  The high level of comfort and the low level of tax consequences makes this a hard benefit to give up even if it often generates public criticism. 

Now it turns out that even the eye popping numbers under the variable cost approach may be an under statement.  The WSJ reported that Chesapeake Energy has been sued for allegedly understating the costs of personal travel on the corporate aircraft for "top executives and outside directors by as much as $10 million per year."  Apparently the suit alleges that the personal use of the aircraft was so great that computation of the value should have included fixed as well as variable costs. 

There may need to be an SEC fix to this issue.  The SEC may have to amend Item 402 (an already excessively long provision) to provide that fixed costs must be included once personal use climbs above a specified percentage.  But in truth this is asking the SEC to fix a problem that really ought to be handled under state law.  Fiduciary duties ought to prohibit this from occurring with any real frequency.  But they do not.  This is because state law requires deference to decisions by "independent" directors. 

Yet at Chesapeake Energy, those same "independent" directors are authorized to use the corporate aircraft for 40 hours of personal use.  See Preliminary Proxy Statement, at 10 ("each non-employee director is entitled to personal use of fractionally owned Company aircraft for up to 40 hours of flight time per calendar year.").  It is this same group that state law says is supposed to oversee personal use by the CEO and other executive officers. 

How are they doing?  Let the preliminary proxy statement speak for itself.  Id.  ("Feedback from the named executive officers indicates that limited access to fractionally owned Company aircraft for personal use greatly enhances productivity and work-life balance, which we believe provides performance and retention incentives far in excess of the cost of the perquisite to the Company.").