Corporate Governance

Keeping the CEO Safe

By J. Robert Brown

The WSJ recently wrote about the amounts paid by public companies to provide their CEOs with sufficient security.  Sometimes the expenses go to the installation of a security system in the CEO's private home, sometimes to pay security guards.  The highest amount was $774,756 (of the companies studied) paid by Occidental Petroleum for its CEO, Ray Irani.  Irani, as we have noted in the past, is a very well paid CEO. 

By comparison, the article noted that Valero Energy, "a rival oil company with more than four times Occidental's revenue, aren't as worried.  Their spending on security for CEO William R. Klesse last year totaled just $239 for a home-alarm monitoring service, a perquisite recently extended to all Valero workers."

The article notes the great disparity among public companies in the payment of these expenses.  They raise concern over whether these benefits are truly necessary or merely provide additional personal benefits to top executives (after all, the expensive security systems are likely not removed once the CEO steps down).  But having said that, there is a much broader issue imbedded in this discussion.  The need to provide security for the CEO is probably the most widely used justification for allowing the CEO personal use of the corporate aircraft. 

Why?  Because under state law, companies cannot allow top officers to make purely personal use of corporate assets (otherwise known as waste).  Where personal use occurs, there must be an underlying business justification.  For personal use of the corporate aircraft (something that can cost companies hundreds of thousands of dollars in real costs), the typical justification is the security of the CEO.  It is a decision by the board and sometimes warranted.  But in other instances, one cannot help but wonder whether in fact the costs to the company of personal use don't commonly outweigh the purported safety benefits.

In the end, it is a matter of state fiduciary duties.  Yet the lack of substantive standards imposed under state law dictates the outcome.  As long as proper process is met, the boards can justify almost any personal use of assets by the CEO, with purported concern about safety a common one. 

Full post as published by The Race to the Bottom on June 11, 2008 (boomark / email).