A recent article in The Wall Street Journal, “SEC Probes Nabors’s Executive Perks, Jets,” reported that Nabors Industries Ltd. had disclosed an informal Securities and Exchange Commission investigation related to perquisites and personal benefits received by the officers and directors of Nabors, including their use of non-commercial aircraft. It is possible that a June 2011 article in The Wall Street Journal, (“Corporate Jet Set: Leisure vs. Business”), piqued the SEC’s interest in Nabors’ executive compensation reporting practices. The June article reported that Nabors had not disclosed the cost of aircraft perks provided to its CEO in 2009 and 2010 – although FAA records indicated that during 2009 and 2010 the most visited destinations after Houston (where Nabors is based) were New York, Palm Beach and Martha’s Vineyard. The article reported that Nabors’ CEO owned houses in all three places, and estimated that the costs of the flights to or from Palm Beach or Martha’s Vineyard alone would have cost around $704,000. A Nabors spokesman was quoted as saying that the company had offices in both Palm Beach and Martha’s Vineyard, at the CEO’s homes, and that the CEO “worked out of those locations a lot.”
The recent article serves as a reminder that the SEC has some firm views regarding the disclosure of what it considers “perquisites and other personal benefits.” Given that journalists and other interested parties recently have been provided with increased access to information on company aircraft movements through the curtailment of the BARR program (discussed below), this may be a good time for reporting companies to take another look at their reporting procedures regarding the personal use of aircraft by their executives.
Nabors is a ’34 Act reporting company, and is subject to SEC executive compensation disclosure requirements. Under Item 402 of Regulation S-K, reporting companies must disclose compensation paid to certain executive officers and directors in the nature of “perquisites and other personal benefits,” unless the aggregate amount of such compensation is less than $10,000. If perquisites or personal benefits are required to be reported for a particular executive officer or director, then each perquisite or personal benefit that exceeds the greater of $25,000 or 10% of the total amount of perquisites or personal benefits must be quantified for that individual and disclosed in a footnote to the compensation table required under Item 402. Item 402 requires perquisites and other personal benefits to be valued on the basis of the aggregate incremental cost to the registrant. Examples of aggregate incremental cost could include the cost of fuel, additional crew expenses, landing fees and other charges attributable to flights conducted for the personal benefit of an executive officer or director. Aggregate incremental cost would generally not include the acquisition cost of an aircraft.
So what makes an item a “perquisite”? In the release that accompanied its most recent revision to Item 402 in 2006, the SEC identified two factors in determining when an item is a perquisite. First, an item is not a perquisite “if it is integrally and directly related to the performance of the executive’s duties.” The SEC provided, as an example of this type of item, a Blackberry or laptop computer, if the company believes it is an integral part of the executive’s duties to be accessible by email to the executive’s colleagues and clients. Otherwise, an item is a perquisite “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.” A company policy that requires an executive to use company aircraft for personal travel for security purposes or the provision of a helicopter service for an executive to commute to work from home may be of benefit to the company, but, in the view of the SEC, is not integrally and directly related to the performance of the executive’s duties and confers a direct or indirect benefit that has a personal aspect. In the SEC’s view, unless that benefit is generally available on a non-discriminatory basis to all employees, it is a perquisite and, if over the $10,000 threshold, must be disclosed.
It is unclear how the Nabors’ investigation will turn out.
What is clear is that the SEC takes a broad view of what constitutes a perquisite, and is likely to regard most kinds of personal use of company aircraft as a perquisite, and subject to disclosure.
It is also clear that the use of company aircraft has recently become easier to track than ever before – thus making the personal use of company aircraft potentially more visible than ever before. Aircraft movements are generally made available on a near real-time basis via the FAA’s Aircraft Situation Display to Industry (ASDI) data feed to subscribers – which include for-profit flight tracking services. Until recently, aircraft owners and operators could request that aircraft identification information be blocked from the ASDI feed via the Block Aircraft Registration Request (BARR) program, which was administered by the National Business Aircraft Association (NBAA) on behalf of the FAA. The BARR program, which did not require any special showing for blocking requests, proved extremely popular with owners and operators of corporate aircraft. Effective August 2, 2011, however, the FAA curtailed the BARR program such that only a request justified by a “Certified Security Concern” would be honored, and it took over the management of the program from the NBAA. Efforts are underway to reverse the FAA’s curtailment of the BARR program, and it is not yet clear how the FAA’s administration of the curtailed program will work in practice. In any event it seems likely that, in the short run at least, the FAA’s action will lead in the direction of more disclosure, not less.
The United States Navy recently purchased 450,000 gallons of algae and animal oil fat based biofuel from Louisiana based Dynamic Fuels, LLC, which is the single largest order of biofuel by the federal government in history. The biofuel is a drop-in fuel, meaning that no modifications to existing engines are necessary, and will be combined with marine diesel or aviation gas to be used in the newly formed “Green Strike Group.” The fuel combination has already been tested in the F/A – 18 fighter jet, as well as the V-22 Osprey and other sea vessels. Critics point out that the $12 million price-tag is too steep during a time which the military is already facing deep budget cuts, however, the Navy has always led the nation in transforming energy use and further, is responding to executive orders and instituted goals to invest in and to attain 50% of its fuel from renewable sources. The 450,000 gallons is only a fraction of the 1.26 billion gallons of fuel the Navy uses each year, but according to the USDA new release, the purchase “accelerates the development and demonstration of a homegrown fuel source that can reduce America’s, and our military’s, dependence on foreign oil.” The Navy’s procurement of the biofuel will enable it to test the cost and energy effectiveness on a large scale platform, which in turn could have a direct impact on the airline industry in the future.
