When the Securities and Exchange Commission recently settled charges against Tyson Foods and its former chairman and CEO Donald Tyson—stemming from $3 million in perquisites and personal benefits paid out to Tyson and other family members—it marked the second case related to how companies dole out perks, and how they disclose them to investors.
The Tyson settlement also sent a message that companies must do a better job of disclosing this sort of information. “The Commission is concerned about the issue of executive compensation and adequate disclosure,” Paul Berger, associate director of the SEC’s Division of Enforcement, told Compliance Week.
Under the deal, Tyson Foods will pay a $1.5 million penalty and Donald Tyson will pay a $700,000 penalty.
The Chauffeur, The Cook, And The Housekeeper
The SEC charged that in proxy statements filed with the Commission from 1997 to 2003, the company made misleading disclosures of perks and personal benefits provided to Donald Tyson before and after his retirement as senior chairman in October 2001. The SEC also charged the company with failing to maintain adequate internal controls over Donald Tyson's personal use of company assets.
The numerous perks included $689,016 in personal expenses for him and two of his friends. The expenses including a $20,000 purchase of oriental rugs, an $18,000 purchase of antiques, a $15,000 London vacation, an $8,000 horse, and other substantial outlays for clothing, jewelry, artwork, vacations and theater tickets.
The SEC asserted that the perks also included $464,132 in personal use of company-owned homes in the English countryside and in Cabo San Lucas, Mexico by Donald Tyson and his family and friends. Those expenses included payouts for the company-paid chauffeur, cook, and housekeeper at the English home and the company's crewed boat in Cabo San Lucas.
The former CEO was separately charged with causing and aiding and abetting the company's disclosure violations. Both parties also agreed to stop violating the proxy-solicitation and periodic-reporting provisions of the federal securities laws. The SEC also ordered Tyson Foods to cease and desist from violating the internal controls parts of the securities laws.
"Characterizing" Amounts
Last September, the SEC settled enforcement proceedings against General Electric, charging the conglomerate with failing to fully describe the substantial benefits it had agreed to provide former Jack Welch under an "employment and post-retirement consulting agreement."
And in a somewhat related case, back in December, the SEC settled enforcement proceedings against The Walt Disney Co., charging the media and entertainment giant with failing to disclose certain related party transactions between Disney and its directors, and for failing to disclose certain compensation paid to a Disney director.
In the case of the director, the Commission asserted that Disney failed to disclose that it provided office space, secretarial services, a leased car, and a driver to the individual, services valued by the company at over $200,000 annually.
Sakowitz
“Clearly the Tyson case indicates that the SEC’s focus is not on disclosing aggregate amounts but properly characterizing the amounts involved,” asserts David Sakowitz, partner with Winston & Strawn.
According to a memo authored by Wachtell Lipton Rosen and Katz attorney Martin Lipton, “The lesson is clear: The nature and amount of any substantial perquisites for named executive officers should be reported to and authorized by the compensation committee or the board of directors.
The key rule regarding perks is Item 402(b) of SEC Regulation S-K. It requires disclosure when perquisites exceed the lesser of $50,000 or 10 percent of the total annual salary and bonus reported for the named executive, according to Lipton.
Two types of disclosures are required for each named executive: the total dollar amount of the perquisites must be included in the summary compensation table, and an additional footnote disclosure is required to specifically identify by type and amount each perquisite that exceeds 25 percent of the total perquisites reported for the named executive, his memo points out.
Some lawyers, however, point out that the wording of the rule still leaves room for interpretation and allows for ways to circumvent the spirit of the rule.
For example, some companies may have a cap on the CEO’s travel and entertainment budget. So, some executives may simply call on subordinates to pay a fat entertainment bill and then put in for reimbursement. This would not be transparent to shareholders.
Undervaluing Perks
Fischer
David Fischer, a partner in the New York office of the law firm, Loeb & Loeb, also suspects some executives balk at providing much detail in the proxy’s footnotes, and may recommend, for example, that the 10-K or proxy include three lines of description rather than three paragraphs.
Fischer and others also assert that companies could have a fair amount of latitude when computing perks as well.
Take the use of a corporate jet. If an executive uses it to attend a meeting as well as attend a child’s wedding on the same trip, how does the company allocate business-related costs? “It gives you a lot of room to fudge,” Fischer theorizes. “You can combine business and pleasure and severely undervalue the perks.”
In fact, former Tyco Chairman Dennis Koslowski, who is on trial for abusing company funds, has argued that the company paid half the $2 million bill for his wife’s birthday party on the island of Sardinia because the executives also attended meetings during their stay.
“Companies value it in different ways,” Sakowitz adds. “I don’t think you have heard the last on this issue.”
The SEC’s Berger, however, disagrees. “You’re required to keep a log of every flight and a manifest of every flight,” he says simply.
Another potential area of abuse is the use of an apartment in another city. Fischer says you need to allocate expenses for market-rate rent, which requires having a real estate appraiser determine this value. “The implicit understanding” is for the appraiser to offer “the lowest possible [value],” he adds.
“This is not an easy thing” to enforce, adds Fischer, referring to some of the potential perk abuses. “There are still a bunch of categories that people struggle with,” Sakowitz adds.
For this reason, he thinks the Tyson case is especially interesting. “It gets further down into the details of compensation disclosure than before,” Sakowitz adds. “It should get people to provide greater scrutiny.”
Which is precisely the SEC’s intent. As the Commission doesn’t have enough money or staff to pursue every potential violation, it relies on cases that it has already brought to hopefully rein in future abuses.
Adds the SEC's Berger, “In enforcement, we hope to bring a message so other companies don’t do what these companies do, or to stop. It has a deterrence effect.”
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