SEC Enforcement Action
On July 2, 2018, The Dow Chemical Company (“Dow”) agreed to settle charges related to its failure to adequately disclose and identify its Chief Executive Officer’s perks in its proxy statements. Specifically, from 2011 through 2015, and in proxy statements reporting on those years, Dow understated its CEO’s perks by approximately $3 million of additional compensation for club memberships, limited use of personal assistant office time, travel to outside board meetings, sporting events and personal activities (including use of the Dow aircraft), and membership fees to sit on the board of a charitable organization.
In finding that Dow had included inadequate perk disclosure in its proxy statements, the SEC held that Dow disregarded the SEC’s standard for determining whether an item is a perk or other personal benefit (i.e., an item with a business purpose is a perk or other personal benefit where it is not integrally and directly related to the performance by the executive of his or her duties). Instead, Dow applied a business purpose standard, which the SEC considered but decided not to adopt when it issued the proxy disclosure rules in 2006.
Under the standard adopted by the SEC, the existence of a business purpose related to the CEO’s job that supports a corporate tax deduction is insufficient to determine that the benefits were not perks that required disclosure in its proxy statements. Some examples of benefits that may be deductible for tax purposes but treated as perks or other personal benefits for proxy reporting purposes include (i) home security or security while on a personal trip for a CEO, (ii) travel expenses by a CEO to attend board meetings of other companies, (iii) exercise equipment/executive physicals, and (iv) club memberships.
Dow agreed to settle the charges by paying a civil penalty in the amount of $1.75 million, hiring an independent consultant to evaluate and recommend changes to Dow’s policies and procedures relating to perk disclosure, and implementing such changes.
Independent Consultant Review
As part of the settlement, Dow agreed to hire an independent consultant to conduct a review of, prepare a written report on, and make recommendations regarding its policies, procedures, controls, and training relating to the evaluation of whether payments and other expense reimbursements should be disclosed as perks under securities laws. The report must be provided to Dow and the SEC.
Dow is not required to implement any recommendation that it considers to be unnecessary, unduly burdensome, impractical or costly. However, Dow must propose in writing an alternative policy, procedure, or system designed to achieve the same objective or purpose.
In light of the SEC’s enforcement action against Dow, it would be prudent for U.S. public companies to engage legal counsel to review their perk disclosure in their proxy statements in advance of the 2019 proxy season.
Attorneys on the Executive Compensation team at Pillsbury are equipped to audit aircraft and other perk disclosures as independent legal experts and to prepare a privileged report for the compensation committee of a company on the company’s perk disclosure practices and policies for a fixed fee. Contact an attorney in the Executive Compensation team to learn more about this service.