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As noted in a prior post, every now and then the SEC Enforcement Division likes to remind companies of the requirement to disclose personal benefits, or perquisites.  I’d even hazard a guess – completely unsubstantiated by research – that enforcement actions regarding perquisite non-disclosure make up a significant percentage of enforcement actions concerning proxy statements.

And yet, companies seem to keep forgetting about perks disclosure.  In some cases, the companies’ disclosure controls may not capture perquisites, but my hunch – again, unsupported by research, but this time supported by experience – is that companies and, in particular, their executives, manage to persuade themselves that the benefits in question have a legitimate business purpose and thus are not personal benefits at all.  Over the course of my career, I’ve heard hundreds if not thousands of reasons why a seemingly personal benefit should be treated as a business expense.  Here are just a few:

  • “All my friends at other companies do it.” To which I repeat what every parent has said at least once in his/her life: “If your friend jumped off the roof, would you?”  And, by the way, on almost every occasion when I’ve checked with those other companies, the friends did not do it.
  • “The company should pay for my [fill in the blank] because all I do is work.” To which my wife would say that if that were the test my employers should have paid for our homes, our food, our clothing, and almost everything else.
  • “It’s important for my spouse be present, so [his/her] travel should be paid for by the company.” To which I note that under the SEC’s approach, spousal travel is rarely a business necessity.

Again, these are just a few of the justifications I’ve heard.  Maybe one day I’ll write a book with a more complete recitation, but it would be a long book indeed.

The SEC’s most recent enforcement action involving perquisites, announced in June 2020, involved a company that had disclosed, “[i]n definitive proxy statements… filed in 2015 through 2019… a total of approximately $1.22 million worth of perquisites and personal benefits provided…, with an annual average of approximately $244,000.”

What’s the problem, you say?  Glad you asked, I say.  The SEC’s report goes on as follows:

“However, these same definitive proxy statements failed to disclose over $5.3 million worth of additional perquisites and personal benefits…, thereby understating the perquisites and personal benefits … by an annual average of over $1 million, or 400%. Items that [the company] … paid for… but did not disclose, include, but are not limited to, expenses associated with personal use of corporate aircraft, rent and other housing costs, personal use of corporate automobiles, helicopter trips, other personal travel costs, use of a car service by family members, club and concierge service memberships, tickets and transportation to sporting, fashion or other entertainment events, personal services provided by … employees, and watercraft-related costs.”

Given that litany (I’m tempted to say “laundry list,” but laundry may have been one of the “other” costs noted by the SEC), one wonders what personal expenses, if any, the executive did pay for, but that’s for another day.

Of course, disclosure controls (or the lack thereof) were only part of the problem.  As further discussed in the SEC report:

“In addition, [the company] failed to devise and maintain internal accounting controls relating to payments for the benefit of, and reimbursements to, [the executive] that were sufficient to provide reasonable assurances that transactions were recorded as necessary to maintain the accountability of assets. These failures included, for instance, a practice of providing expense reimbursements to [the executive] without requiring an adequate explanation of a business purpose for the expense, allowing [the executive] to approve his own expense reimbursements, and a lack of a mechanism to ensure [the executive] paid for personal usage of corporate aircraft.”

In other words, the disclosure violation appears to have been symptomatic of more fundamental, serious problems.

As indicated in the prior post, there are some things you can (and, IMHO, should) do regarding perks, as follows:

  • Keep your executives and those responsible for reporting compensation and benefits informed about the relevant disclosure requirements and the SEC’s willingness to enforce them.
  • Include a broad definition of “perquisites” in your annual D&O questionnaires and ask pointed questions on the topic – possibly including examples – that your executives will have to consider. In that regard, tell your executives that they (rather than their assistants) must fill out their questionnaires and that an answer like “everything’s the same as last year” won’t fly.  (Note – this is far easier said than done.  Had I invented a system to force people to pay attention to these questionnaires, I could have retired years ago.)
  • Check with your company’s internal recordkeeping departments – comp and benefits, payables, etc. – and be prepared to ask questions about payees or payments that don’t sound right. Enlist your internal audit team, and possibly your independent auditors, to check expense accounts and other records that could yield information about perks.
  • If you learn about a perk that triggers a reporting requirement, disclose it or have the executive reimburse the company for it (though that may not work in all cases).  Hiding it could lead to more serious problems for the executive, for the company, and for you.