In an unusual enforcement action, on July 2, 2018, the Securities and Exchange Commission (“SEC”) announced that Dow Chemical Company (“Dow”) agreed to settle charges relating to “inadequate” perquisite disclosures in their SEC filings from 2011 through 2015. The perquisites identified by the SEC — which included personal use of company aircraft for travel to outside board meetings, sporting events, and personal activities, club memberships, use of personal assistant office time, and membership fees — total approximately $3 million.
As a reminder, when executives and directors of a public company are granted certain types of compensation or benefits not otherwise categorized by the SEC’s compensation disclosure rules, the company is required to disclose such compensation and benefits as “other compensation” on their annual proxy statement in the Compensation Discussion & Analysis section. “Perquisites” are benefits provided to executives and directors that are not “integrally and directly related” to a beneficiary’s job duties. For example, if the CEO uses the company jet for a family vacation, that needs to be disclosed on the company’s proxy statement. The SEC has not heavily enforced perquisite disclosure requirements historically.
In the Dow order, the SEC determined that Dow had applied an incorrect standard in evaluating whether a benefit qualified as a perquisite; instead of determining whether a benefit was “integrally and directly related” to the executive’s job duties, the company excluded any benefit from disclosure so long as it was related to a “business purpose.” The SEC also criticized Dow for having inadequate procedures for ensuring proper perquisite reporting and for inadequately training employees on reporting requirements. To settle the action, Dow agreed to pay a $1.75 million civil penalty and to retain an independent consultant to review its policies, procedures, controls and training related to perquisite disclosures. The consultant will be required to provide a report on its findings to the Commission.
Although SEC enforcement actions for inadequate perquisite disclosure have been relatively rare, failing to properly disclose perquisites can be costly. Companies that provide executives with significant benefits — particularly benefits that are high profile such as personal use of the corporate aircraft, reimbursements for travel, and club memberships — need to have proper controls in place to effectively and accurately evaluate and disclose these benefits. Proper controls may include taking such steps as (1) limiting the ability of the CEO and other executives to approve their own use of corporate assets, including any corporate aircraft or secretarial support, for personal use; (2) including questions on perquisites in the annual officer questionnaire; and (3) adopting an executive perquisite policy or guideline that outlines disclosure requirements and potential areas of risk.