WHEN Ross Johnson was chief executive of RJR Nabisco, the tobacco-to-biscuits conglomerate, in the 1980s, he sent Rocco, his pet dog, on a 2,000-mile flight aboard the company jet.
According to the story, made famous in Barbarians at the Gate, a book about the leveraged buyout of the company in 1988, Mr Johnson had been playing in a golf tournament in a Palm Springs resort when the German shepherd bit a security guard, prompting concern that the dog would be quarantined or worse.
Rocco was smuggled on to one of RJR Nabisco’s 10 private jets, listed as the passenger ‘G Shepherd’ and flown from California to the group’s headquarters in Winston-Salem, North Carolina, with an executive as his chaperone.-
It would be hard to find the head of a publicly listed group doing something so egregious in 2016 but according to a study by the Financial Times of more than 1,000 corporate filings for every company in the US S&P 500 index over two years, some executives still use company aircraft as if they were their own property.
The total spent by S&P 500 companies on personal corporate jet flights was roughly $40m a year in 2013 and 2014, a relatively small amount when compared with the billions of dollars spent on salaries and bonuses but big enough to be seen by some investors as a harbinger of poor corporate governance.
The Rocco episode was not the only instance of excess aboard Nabisco’s fleet of jets, known as the RJR Airforce and operated by 36 corporate pilots. For many, the story — which some have disputed — was the high-water mark of corporate largesse and one of the catalysts for a decades-long push to crack down on overspending at public companies.
Corporate jets are just one of many perks granted to executives by compliant boards over the years, alongside rent-free accommodation and memberships to country clubs. They have loomed large in the public consciousness, a gleaming symbol of corporate machismo, exclusivity and inequality.
“There is a question as to why it is that the people who are the most highly paid at a company are the ones who receive an array of free perks,”
says Carol Bowie of Institutional Shareholder Services, which advises investors on how to vote at annual meetings. “You can’t disguise the fact that these people are those best able to afford to pay for such things themselves.”
Private jets became a flashpoint in the public anger that followed the financial crisis of 2008, with US politicians lashing out at executives from GM and Chrysler after they used corporate aircraft to travel to Washington to ask for a multibillion-dollar taxpayer bailout. AIG, the insurer, also came under fire for continuing to operate a fleet of jets after receiving $180bn of bailout funds.
The outrage caused many companies to limit personal use of corporate aircraft, as did the introduction of disclosure rules a decade ago, which force public corporations to reveal how much is spent on the perk. The US Securities and Exchange Commission ushered in the rules in 2006 amid fears that companies were effectively paying executives more than they were telling investors, with freebies such as private jet flights, lump sums to pay their taxes and memberships to luxury golf resorts.
Most companies in the S&P 500 still operate private jets or lease them from a third party on the premise that commercial air travel in the US, which is plagued by delays and queues at security, is uneconomical for executives who are paid millions of dollars a year.
Many, however, have forbidden executives from using the aircraft for personal trips, or dramatically reduced the amount they can spend on the perk. Goldman Sachs does not allow Lloyd Blankfein, its chief executive, to use the company jet for his holidays, while Jamie Dimon, his counterpart at JPMorgan, spent less than $50,000 on personal flights aboard company jets in 2014.
Some bankers still take advantage of the benefit, though: in 2014, almost $240,000 was spent on a single round-trip to Australia for James Gorman, chief executive of Morgan Stanley, to attend his mother’s funeral.
The FT’s corporate jet files show there are still a significant number of companies which are spending large sums on personal flights, and in many cases much more than they were before the financial crisis.
Barry Diller, chairman of InterActiveCorp and Expedia, for instance, took personal flights worth $834,000 on the company jet in 2005, almost half the $1.7m he spent in 2014, while the amount spent on non-business trips by executives at Leucadia, owner of investment bank Jefferies, has jumped from $435,000 in 2005 to about $1m a year.
Arthur Kohn, a lawyer at Cleary Gottlieb who advises companies on corporate aircraft, says greater scrutiny of perks has prompted many groups to rethink their policies.
“Nevertheless, personal use of corporate aircraft is one of the perks that has been most resistant in the face of criticism,” he says. “My experience suggests that many companies continue to offer it.”
The FT’s analysis has found that it is not necessarily executives at the largest groups who are the biggest users of company jets for personal travel. Tim Cook, Apple’s chief executive, does not receive the perk, although the company did buy his predecessor, the late Steve Jobs, a personal jet that cost $90m in 1999. None of the executives at Microsoft receives the benefit, either.
Of the top 20 groups in the S&P 500, just three — Google, Facebook and Procter & Gamble — appear in either the top 10 list of biggest-spending companies or executives.
Conversely, several relatively small companies were big spenders. Freeport-McMoRan, the copper and gold producer, ranks as number 354 in the S&P 500 for market value but spent $1.2m on personal jet travel in 2014 — more than any other company. Constellation Brands, the beer and wine group, and DaVita Healthcare Partners, the kidney dialysis group, also feature in the top 10.
Otherwise, the ranks are dominated by companies where the founder or their family still exerts influence, such as Tyson Foods.
The largest US meat processor is chaired by John Tyson, grandson of the company’s founder. In 2013 and 2014, Mr Tyson and executives took personal flights aboard the company aircraft worth $2.3m.
Comcast, the cable and broadcasting group founded by Ralph Roberts, and now run by his son, Brian, spent $2.2m on personal private jet flights during the same period.
Ms Bowie of the ISS says high spending on personal use of corporate jets is a ‘red flag’ — a warning sign that executives are treating a public company as if it were a family-owned enterprise, or that the board of directors does not exert enough control.
David Yermack, a professor at the Stern School of Business at New York University, conducted an analysis in 2005 that established a link between aircraft perquisites and inferior shareholder returns. Mr Yermack analysed a decade’s worth of data on 237 large companies and found those that disclosed corporate aircraft benefits underperformed market benchmarks by more than 4pc a year on average.
This chief executive perquisite, where disclosed, “is associated with severe and significant underperformance of their employers’ stocks”, Mr Yermack said.
Additional reporting by Jennifer Bissell
Published in Dawn, Business & Finance weekly, March 14th, 2016