TheCorporateCounsel.net

In light of the shocking murder of UnitedHealth’s CEO last week and the risk that similar events may occur in the future, many companies are enhancing security arrangements for their executives or establishing those arrangements for the first time. While companies may be inclined to conclude that these security arrangements are a necessary business expense, they need to be aware that the SEC typically views them as “perks” subject to disclosure in proxy materials.  This excerpt from Chapter 7 of our Executive Compensation Disclosure Treatise (available on CompensationStandards.com) explains the SEC’s position:

From the company’s perspective, [personal security] expense is integrally and directly related to the performance of its executives’ duties—necessary to ensure their safety, particularly where they frequently travel internationally or their celebrity makes them an inviting target for kidnapping or other personal injury.

Notwithstanding these beliefs, the SEC has expressly stated that it considers expenditures incurred to ensure the personal safety of a named executive officer to be a disclosable perquisite. Specifically, the SEC has held that business purpose or convenience does not affect the treatment of an item as a perquisite where it is not integrally and directly related to the performance by the executive of his or her job.

Accordingly, a company’s decision to provide an item of personal benefit for security purposes does not affect its characterization as a perquisite. For example, a company policy that for security purposes an executive (or an executive and his or her family) must use company aircraft or other company means of travel for personal travel, or must use company or company-provided property for vacations, does not affect the conclusion that the item provided is a perquisite or personal benefit.

Companies should also note that as part of its qualitative evaluation of executive comp programs, ISS has sometimes been critical of the amounts expended for executives’ personal security arrangements. Whether recent events will prompt the SEC to take a more nuanced position or ISS to reconsider what security expenditures should be regarded as “excessive” remains to be seen.

We cover compensation-related issues on CompensationStandards.com and this is a topic we’ve blogged about there in the past, but since executive security arrangements are top of mind for so many companies right now, we thought it was appropriate to flag the potential disclosure requirements here as well.

– John Jenkins