Corporate jets: the new backdating?

Larry Ribstein —  16 June 2011

Looks like a new scandal is brewing. 

A WSJ article co-written by one of the backdating reporters (Mark Maremont) looks through FAA flight records to find that

dozens of jets operated by publicly traded corporations made 30% or more of their trips to or from resort destinations, sometimes more than 50%. Often, these were places where their top executives own homes. The review covered nearly every jet flight in the U.S. over the four-year period from 2007 to 2010.* * *

Now, before we get too panicked, there are explanations.  As one lawyer said, “Even if they go to a resort, they’re still reviewing papers, looking at their BlackBerrys and talking on the phone. You just can’t compartmentalize these guys’ lives.” And there could be business reasons for the trips (e.g., if with clients), or the leisure stop could be a low-cost add-on to a business trip, or there may be security reasons for having the private jet to go everywhere.  And the Journal found some firms fully disclosed actual costs of the personal flights.

Assuming the jet use is a pure perk, how worried should we be? 

David Yermack, Flights of Fancy: Corporate Jets, CEO Perquisites, and Inferior Shareholder Returns (SSRN), 80 J. FIN. ECON. 211 (2006), found that firms that disclosed executive use of company plans underperformed the market by more than 4% annual, far exceeding the cost of the plane use, and on disclosure their stocks dropped an average 1.1%.

But Henderson & Spindler, Corporate Heroin: A Defense Of Perks, Executive Loans, And Conspicuous Consumption 93 Geo. L.J. 1835 (2005) (SSRN) show how corporate perks such as jet use can reduce final period problems that arise when executives have saved enough to retire. However, Henderson & Spindler note that that perks “can lead to undesirable employee behavior when inappropriately or excessively implemented.” 

So firms should disclose the costs of personal jet use.  And the SEC should clarify the disclosure rules (e.g., does an executive home office in a vacation home count as a company office?).  No doubt Gretchen Morgenson and her ilk will villify the executives who use the jets whether or not the use is efficient.  At some point we’ll get a story about how some firms are going private so they can use jets.

So now you have all the stories and you’re free to worry about other things.

Larry Ribstein

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Professor of Law, University of Illinois College of Law