Corporate Governance

Corporate Jets and Corporate Compensation (redux)

By J. Robert Brown

The Economist has a nice little piece on the current waive of companies selling their corporate jets.  Corporate jets have become the current example of wastefulness by corporations.  The result has been public pressure on companies, particularly those with their hands out in Washington, to get rid of the luxury.  But, in fact, some are and some are not.  Moreover, the motives for doing so have very little to do with good corporate governance.   For one reason, in a bad economy, they are expensive to operate.  As the Economist notes:

• If the car executives are to blame, so too is the dire state of the economy. Struggling companies agree with Congress: in hard times an obvious way to save money is to sell the odd jet. (A new one costs $10m-50m to buy and at least $2,000 an hour to run.) Other firms are cancelling orders for new jets because they cannot secure financing for them, making dozens of once-coveted delivery slots available. There are few takers.

We have, incidentally, made the same point.  At the same time, however, a few high profile sales do not a trend make and the Economist suggests that in fact little has really changed.

• But not all companies that have put their jets up for sale are cash-strapped. And according to analysts at JPMorgan, asking prices for used jets actually rose by 3.4% in the year to November. Jonathan Breeze, chief executive of Jet Republic, a private-jet operator, suggests that some announcements that firms are selling their jets are “elaborate window dressing”. By putting jets up for sale at a high price that ensures nobody will buy, companies can appear frugal—even as their bosses continue to fly as usual.

Said another way, once the economy recovers, the jets will return.  The problem is one of oversight and management.  The true gatekeeper for excessive use of corporate aircraft (including its use for personal reasons by top officers and family members) is the board of directors.  Yet the board, either through capture or economic incentives, has little incentive to rigorously ensure that the use of private aircraft truly benefits shareholders. 

This is a problem of Delaware law and the Delaware courts and until that is fixed, the problem will remain. SOX addressed a similar issue when boards could not be trusted to make loans to top executives and simply banned them, a step necessitated by weak standards under Delaware law.  A better approach would be to alter the standards for board approval, overturning the weak standards under Delaware law.

Full post as published by The Race to the Bottom on January 20, 2009 (boomark / email).