““CEOs go to their vacation homes just after companies report favorable news, and CEOs return to headquarters right before subsequent news is released. More good news is released when CEOs are back at work, and CEOs appear not to leave headquarters at all if a firm has adverse news to disclose. When CEOs are away from the office, stock prices behave quietly with sharply lower volatility. Volatility increases immediately when CEOs return to work.” —David Yermack, a New York University finance professor, whose recently released study shows a correlation between when CEOs take their private jets on vacation and movements in their companies’ stock price ”
Buying business aircraft: The board member’s role
For most corporations, the purchase of a business jet represents a major transaction that requires approval of the board of directors. What should the directors consider when the company is thinking about buying an aircraft?
To discharge their fiduciary duty to the stockholders, corporate directors must determine whether acquiring an aircraft is reasonable and prudent. The fact that the company is performing well and making lots of money may mean that it can afford a business jet, but that doesn’t necessarily mean that the purchase would be justified. On the other hand, a company that isn’t performing well may find that a business aircraft would enhance its productivity and increase profitability. A study by NEXA Advisors commissioned by the National Business Aviation Association (NBAA) and others shows a direct and compelling correlation between business success and use of corporate aircraft.
Of course, directors can’t do their job properly if they have vested interest in the outcome (e.g., if the corporation is providing them with free use of its jets). A shareholder of financially struggling Chesapeake Energy Corporation recently filed a derivative action against the directors of the company, seeking to recover millions of dollars that had allegedly been wasted on personal flights. The complaint points out that the non-employee directors not only received magnanimous cash compensation (in 2011, when the board met four times, the directors’ compensation ranged from $467,026 to $620,438); the directors also awarded themselves 40 hours of personal use on the company’s NetJets shares. The complaint suggests that the board was crippled by a conflict of interest when sanctioning non-business travel by Chesapeake employees on NetJets shares.
A board is on stronger ground when a company uses its aircraft exclusively or predominately for its business. The time-saving and other advantages of using a corporate aircraft are well known. The directors may wish to retain an independent consultant to study the company’s travel patterns and advise about whether using a business aircraft makes sense. The NBAA’s “No Plane, No Gain” website (noplanenogain.org) offers valuable information for the directors to consider, including the NEXA study referred to earlier.
The directors should document the reasons for acquiring the aircraft and its anticipated use. This has many benefits, including tax deductions for business use. The directors should also consider creating a written policy that details who can use the aircraft and under what circumstances. The policy may even require key executives to use the company aircraft for reasons such as personal security and protection of confidential information.
But the elephant in the closet is personal use. Once the company has access to a business aircraft, corporate executives may wish to use it for personal travel. Should the directors reject out of hand the acquisition of an airplane that would be used–perhaps even mostly used–for non-business travel, especially on a no-charge basis?
The answer depends on the overall compensation package for executives provided by the company. The chief executive officer, for example, may receive compensation in many forms–stock options, a country club membership, a leased automobile. There is nothing wrong in concept with use of a company aircraft being a factor in the CEO’s overall compensation package. The board could require the executive to pay for the flights, which might reduce stockholder grumbles. But is there a real difference (other than proxy disclosure) between a compensation deal that includes $5 million in salary and $500,000 of free flight time on the company aircraft and one that stipulates a $5.5 million salary with the executive paying for the transportation? Note that FAA regulations impose restrictions on an executive’s ability to pay for flights and that there are tax consequences to consider for both the company and the employee in the case of personal flights.
Further, the directors could reasonably conclude that the company should acquire an aircraft specifically to provide non-business travel to certain executives or to transport them from their homes to company headquarters. Indeed, this is often a major issue in negotiations to hire a key executive who resides–and will continue to reside–far from the corporation’s offices.
If the company is public, it should carefully scrutinize non-business travel aboard its aircraft by key executives and their families to ensure compliance with SEC reporting regulations. Generally, the SEC requires that the aggregate incremental cost of the trip be reported, though the shareholder in the Chesapeake suit argued that fixed costs should also be included since a high percentage of the aircraft use was personal. Company filings must also disclose material transactions such as a lease or time share of the aircraft to the CEO.
The board has a responsibility to ensure that the company acquires the right aircraft for the right missions. It doesn’t make sense to buy a Gulfstream G550 to fly between New York and Boston. Nor does acquiring a whole aircraft (as opposed to a fractional share) make sense when the company anticipates flying an average of only 100 hours per year. The board may want to obtain advice from an acquisition consultant about the company’s best options for business aircraft travel.
Both the IRS and FAA recognize that companies may require an executive to use their aircraft even on personal trips, and taking advantage of accommodations offered by these agencies requires action by the board of directors. In response to concerns about the executive’s safety and security, the IRS offers tax advantages if the company has an overall security program or has obtained an independent professional determination that the executive should fly on company aircraft [See “How a Security Program Can Cut Flying Costs,” available at www.bjtonline.com.–Ed.]. Further, the FAA recently recognized that a company’s board of directors (or other governing body) could develop a policy designed to anticipate circumstances that loosen the restrictions on the ability of the executive to reimburse the company for flight expenses of non-business trips [See “Paying for Flights on the Company Jet,” available at wwwbjtonline.com.–Ed.].
To properly discharge their responsibility, the board should obtain independent, professional advice. If the directors make use of the significant resources available and exercise common sense, they can promote their company’s success through business aviation while avoiding the unenviable position of the Chesapeake directors.
An Action List for Board Members
• Determine whether buying the aircraft is reasonable and prudent.
• Ensure that it is the right model for the job.
• Consider hiring an independent consultant.
• Document reasons for acquiring the aircraft and its anticipated use.
• Consider creating a written policy regarding the airplane’s use.
• If the company is public, scrutinize non-business use to ensure compliance with regulations.