This SEC Order, In the Matter of The Dow Chemical Company, is a great refresher—at Dow’s expense, unfortunately for Dow—on the analysis required to determine whether or not certain expenses and benefits are perquisites or personal benefits that must be disclosed in the Summary Comp Table in the proxy statement. As you probably know, the analysis for determining whether an item is a disclosable “perk” can be very tricky to apply, especially when it involves the use of corporate jets by executives and their friends and families. The SEC claims that Dow applied the wrong standard altogether in its analysis, failing to disclose over a five-year period $3M in CEO perks and understating the CEO’s disclosed perks by an average of 59%. Dow settled the charges for a fine of $1.75M and also undertook to engage an independent consultant that would perform a review of Dow’s policies, procedures and controls and conduct training related to the determination of perks.

According to the Order, while Dow followed procedures in its perk evaluation, those procedures were not correct because they applied a test that did not conform to the SEC’s standard for perks disclosure. The order, quoting from the 2006 Executive Comp Rules Adopting Release, lays it out well:

“‘an item is not a perquisite or personal benefit,’ and does not need to be reported, ‘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 non-discriminatory basis to all employees.’ The Adopting Release also states that ‘the concept of a benefit that is ‘integrally and directly related’ to job performance is a narrow one,’ which ‘draws a critical distinction between an item that a company provides because the executive needs it to do the job, making it integrally and directly related to the performance of duties, and an item provided for some other reason, even where that other reason can involve both company benefit and personal benefit.’”

The SEC’s perks test is not to be confused with a typical “business purpose” test used for tax purposes: a determination “that an expense is an ‘ordinary’ or ‘necessary’ business expense for tax or other purposes or that an expense is for the benefit or convenience of the company,… is not responsive to the inquiry as to whether the expense provides a perquisite or other personal benefit for disclosure purposes….[B]usiness purpose or convenience does not affect the characterization of an item as a perquisite or personal benefit where it is not integrally and directly related to the performance by the executive of his or her job.”

According to the Order, Dow did just that, applying a “business purpose” standard under which Dow did not consider a benefit to be a perk if it had a business purpose that was related to the executive’s job. In addition, the Order alleges, Dow did not provide proper training about the correct standard for employees preparing the CD&A and comp tables and employed inadequate processes and procedures regarding perk reporting under the SEC’s standard. The Order also found that Dow did not fully comply with its own policies, including its policy that the company review changes to relevant SEC rules annually, “market response, audit feedback, analysis of other companies’ disclosures, and changes in Dow’s compensation benefit programs.”

In addition to personal use of Dow aircraft, other undisclosed CEO perks identified in the Order included travel to outside board meetings, sporting events, and personal activities; club memberships; limited use of personal assistant office time; and membership fees to sit on the board of a charitable organization. As is fairly typical, Dow did not admit or deny the SEC’s findings, and a company spokesperson assured Reuters that the “expenses at issue were legitimate business expenses authorized by Dow and within the scope of executive job duties.” (Good PR maybe, but not exactly “responsive to the inquiry.”)

According to Reuters, the charges followed a three-year investigation by the SEC, begun in the same year that Reuters published a series regarding internal audits at Dow conducted by internal investigators into the CEO’s perks and whether they had been properly disclosed to shareholders. Among the items they identified were personal vacations taken by the CEO and his family using Dow aircraft, parties the CEO gave at sporting events “including the Super Bowl, allegedly with few Dow customers in attendance, and Dow’s financial support for the Hellenic Initiative, a Greek charity” the CEO had co-founded. Reuters reported that one of the Dow investigators had filed a whistleblower anti-retaliation lawsuit in 2014 “alleging she was fired after questioning perks that Dow had provided… and whether they were properly accounted for.” Reuters also found that several other Dow officials had “raised questions about the CEO’s spending of Dow funds….”