August 10, 2018
A recent SEC action that resulted in a penalty of $1.75 million has reinforced the need of publicly traded companies to accurately disclose in their public filings all items of compensation, including perquisites, that they pay to their named executive officers.
Background
On July 2, 2018, the SEC instituted a cease and desist order against The Dow Chemical Company for failing to properly disclose $3 million in perquisites that Dow Chemical provided to its chief executive officer. In connection with the order, the SEC and Dow Chemical reached a settlement in which Dow Chemical agreed to pay a civil monetary penalty of $1.75 million and to complete certain remedial undertakings.
Under Item 402 of Regulation S-K, public companies are generally required to disclose all compensation that they pay their named executive officers (NEOs) in its proxy statements and other reports that they file with the SEC. In order to comply with Item 402, a public company must include in this disclosure all perquisites and personal benefits that it provided to each NEO for a given year if the total value of all such benefits for such year is $10,000 or more.
Item 402 provides that a perquisite is any item that the company provides to a NEO that is not “integrally and directly related” to the performance of the NEO’s duties. Item 402 further provides that an item is a perquisite if it confers a direct or indirect benefit that has a personal aspect regardless of whether the company provides it for a business reason or for the convenience of the company.
The SEC has repeatedly interpreted perquisites broadly and provides very narrow exclusions from disclosure. For instance, it stated that a compensation item need not be disclosed only if the NEO needs the item to perform his or her job. Examples of items that are not perquisites are office space and reimbursement for travel expenses used solely for business purposes.
The SEC found that Dow Chemical did not use the correct standard when it determined that certain items it provided to its CEO, including non-company-related travel, club memberships and sporting events tickets, were not perquisites. It found that that even if these expenses had some business purpose, they were not integrally related to the CEO’s position and therefore should have been disclosed.
Action Items
Dow Chemical’s circumstances should remind each public company that it needs to carefully identify and analyze each benefit that it provides to its NEOs to determine whether it requires disclosure as a perquisite. Among other things, a public company should:
- Review its procedures and controls relating to the evaluation of whether it needs to disclose payments and other reimbursements.
- Coordinate with its human resources, accounting, general counsel and other departments to determine all items that the company provided to each executive officer that may constitute a perquisite or personal benefit.
- Work with securities counsel to apply the correct standard to determine whether the item must be disclosed in its SEC filings.
- Develop non-boilerplate disclosure language to include in each SEC filing that justifies the use of perquisites and personal benefits for its executive officers.
- Accurately value each perquisite in accordance with applicable accounting and SEC guidance.
Stevens & Lee has many years of experience assisting public companies of all sizes in complying with their SEC executive compensation reporting obligations. Contact Charles C. Scheim at Stevens & Lee for more information.
Related Attorney:
Charles C. Scheim
This News Alert has been prepared for informational purposes only and should not be construed as, and does not constitute, legal advice on any specific matter. For more information, please see the disclaimer.