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BOARDROOM GUIDE - Directors Responsabilities & Corporate Aircraft Use

Keith Swirsky considers how a Director should respond to inquiries from shareholders or other third parties when asked why the company has a corporate aircraft- or about personal use of the aircraft by senior officers and fellow Directors.

AvBuyer   |   1st October 2010
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Directors’ Responsibilities & Corporate Aircraft Use

Keith Swirsky considers how a Director should respond to inquiries from shareholders or other third parties when asked why the company has a corporate aircraft- or about personal use of the aircraft by senior officers and fellow Directors.

In the current political and financial climate- Directors may duck and cover when use of a corporate aircraft is a topic for Board consideration. This article is intended to raise awareness of legal issues Directors need to consider during their analysis. Subsequent articles will attempt to address these topics in greater detail- providing a valuable resource to Directors.

When you are a Director of a publicly traded or widely held company that either has an existing corporate aircraft or there is an impetus to acquire one- you have an obligation to the shareholders to consider the pros and cons of corporate aircraft ownership.

In particular you must be aware of the regulatory environment in which a corporate aircraft is operated- and the risks to the company associated with such operations.

It is commonly accepted that human resources are a company’s most valuable asset- and also that the senior executives of any company are best situated to enhance the revenue base of the company- so increasing the productivity and efficiency of the senior executives should be a focus of Directors.

Limiting use of a company aircraft simply to senior executives- however- is a simplistic approach to a sophisticated issue of how to obtain the greatest productivity from personnel and time. Depending upon the nature of their assignments- many employees in technical and sales positions have pressing needs to access the efficiencies of travel via the company aircraft. In fact- industry studies show that only 22 percent of passengers on company aircraft are top management—the remaining 78 percent cover a spectrum of job titles.

Directors should understand the company’s geographic markets and the propensity of its executives to travel to these geographic markets. When a company’s personnel travel by commercial air transportation- travel fatigue and the prospect of additional nights away from home and the family can reduce their efficiency and their willingness to undertake business travel on a regular basis; anyone who has traveled with the airlines knows that it is a challenge to arrive to meetings timely and refreshed.

It is also essential that Directors differentiate between appropriate use of a corporate aircraft as an asset that supports the corporation’s ordinary and necessary business functions (eligible for favorable tax treatment)- and usage that fails to meet allowable standards for business expenses as specified by government statutes.

Rules imposed by federal and state taxing authorities relating to company aircraft have a significant impact on Board decisions. Aircraft that are necessary for furtherance of the corporation’s business can be an attractive source of funds due to accelerated depreciation and other incentives to purchase capital equipment. Sales- use and property taxes related to company aircraft vary from state-to-state- and may change as individual states seek ways to close budget shortfalls in today’s challenged economy.

Non-tax issues- such as Federal Aviation Administration and Department of Transportation regulations governing the structuring of company flight departments and reimbursements for transportation services to employees and clients- also fall within the purview of Directors. The securities and Exchange Commission demands filings regarding the benefits employees receive by using the company aircraft for non-business purposes.

Not to be overlooked are issues of optics and fairness—while the use of an aircraft may be tax-deductible and legal under federal law- is it consistent with the company’s Vision- Mission and Values? For example- is it appropriate to provide key employees with access to the company aircraft for personal use as a component of the employee’s compensation package?

There has been- and continues to be heavy scrutiny on personal use of corporate aircraft by executives and Directors. A Director’s obligations include understanding appropriate and competitive compensation packages for senior executives and Board Members- which can take the form of both cash and non-cash benefits. A corporate aircraft is certainly a non-cash benefit when offered to a senior executive or Director for personal use. Many companies offer a non-cash fringe benefit of personal use of a corporate aircraft.

Directors need to obtain information on the cost to the company for providing this benefit- not only the need to provide the benefit. When the cost is matched with the compensation analysis and the benefit is shown to be greater than cost incurred- Directors have fulfilled their obligations to ensure competitive compensation packages to attract and retain qualified executives.

Further- Directors should examine the humanitarian and charitable uses of its corporate aircraft. All corporations must be mindful of their community and social obligations - the corporate aircraft can play a role in this regard. The topics are many and complex- and the need for expert advice is great. In subsequent issues- we will address the areas where Directors should be sensitive to those aspects of aircraft operation that impact shareholder value.

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