Corporate Governance

CEO Use of Private Aircraft and the Delaware Approach to Compensation (Part 2)

By J. Robert Brown

So it seems that the market for private aircraft has gotten soft, what with the auto makers and others bowing to public pressure (and mandatory terms of a bailout) and selling their jets.  The auto companies aren't alone.  As the NYT notes:

• To control costs, companies including Citigroup and Time Warner are selling their jets.  Alcatel-Lucent has allowed leases on two jets to expire without renewing them and has put its third jet up for sale.

Whether the small number of examples really reflects a trend in the corporate universe is too early to tell.  Nonetheless, the possible trend begs the broader question.  What were these corporations doing with these jets to begin with?  Isn't this a little bit like those companies that managed to amass art collections at shareholder expense?  In fact, Delaware law, which controls these decisions, allows a board to justify any action, no matter how flagrantly against the interests of shareholders, so long as they are approved by "independent" directors. 

But as we have noted often on this Blog (and in great detail in the article, Disloyalty Without Limits: 'Independent' Directors and the Elimination of the Duty of Loyalty), the Delaware courts use a number of mechanisms to ensure that boards are not necessarily independent, with the devices ranging from excessive pleading standards to inconsistent tests for independence.  In other words, the procedural safeguards are not safeguards at all.

The truth is that jets (and corporate art collections) are being eliminated only because of the severity of the economic crisis and the attendant publicity that comes with their possession.  They are not being eliminated because Delaware courts have suddenly imposed on directors a stricter burden when it came to such expenditures.  Moreover, unless the law changes at the federal level, it can be expected that corporations will go back to their private jets once the current economic crisis passes.

Full post as published by The Race to the Bottom on December 26, 2008 (boomark / email).