NBAA’s No Plane-No Gain information campaign was created several years ago to combat the image of business aircraft portrayed in mainstream media as the private conveyances for top-level company executives heading to a teetime. According to NBAA’s campaign website (www.noplanenogain.com), few bizav flights in fact carry executives, with the majority (74 percent) being time-critical trips by sales, technical and middle management employees.
Yet, in a recent case involving Oklahoma City-based Chesapeake Energy, the company announced that it was halting the personal use of its corporate airplanes by company directors in response to criticism from shareholders. One of the nation’s largest natural-gas providers, publicly-traded Chesapeake is facing financial difficulties, and its largesse to its directors in terms of salary and perks such as, free use of corporate aircraft, made an easy target for angered investors, one of whom filed a shareholder derivative petition with a district court of Oklahoma against the company’s executives and board members, alleging a breach of fiduciary duties, waste and unjust enrichment.
According to a company filing with the Securities and Exchange Commission (SEC), Chesapeake’s non-executive board members were each granted up to 40 hours of personal use each year on the company’s fleet of 22 (according to FAA aircraft registration records) fractionally-owned aircraft, which includes a Gulfstream 550, GIVs, G450s, as well as a Cessna Citation Sovereign, Citation Xs and Citation Excels. A report by Bloomberg said that the company spent more than $1 million on perks for directors last year, including airplane usage. The complaint stated that the company misreported the aggregate incremental costs of the aircraft attributable to personal travel, an amount of approximately $10 million. The plaintiffs seek restitution from the company’s director defendants for that amount plus punitive damages in a case that is currently underway.
While such personal use of corporate aircraft is relatively uncommon in a public company, amid tighter SEC and IRS scrutiny more companies are interested in adopting carefully-crafted executive aircraft use policies to avoid such problems. I recently spoke with Ruth Wimer, a partner in the Washington, D.C. law firm McDermott Will & Emery who has specialized in executive compensation for nearly three decades and is an expert in the use of company aircraft by executives from a legal perspective. She said the firm has been receiving more requests lately from clients seeking help in the creation of such usage guidelines.
While Wimer said that some clients will simply say, “Give me an aircraft policy,” she believes that such policies must be a reflection of the individual corporate philosophy. “The policy itself is one that the company says they feel meets their goal in running their business,” she noted. Wimer sees a wide range of allowable corporate aircraft use among clients ranging from 80 percent personal use in closely-held private companies to sometimes negligible amounts in more conservative public firms. Some allow guests to go on the flights, but require the executives to pay the proper taxes under the standard industrial fare level (SIFL) rules.
To Wimer, a successful policy is one that provides executives with information of what they might expect under various usage scenarios, with regards to the FAA, SEC and IRS regulations. “If you have a policy which tells the executives and other employees what they can and cannot do with respect to the aircraft and also instructs them as to the tax and SEC consequences then they will have the knowledge to use the aircraft properly.”
That knowledge can help avoid problems in the long run. “The executives that I deal with are extremely interested in doing the right thing, and will say to me 'if there is any doubt that I can bring a guest or I know a certain trip will cost the company money, I don’t want to do it,”” she noted. Such knowledge, if properly applied can also help protect the company when auditors or shareholders come knocking.