Sunday, March 1, 2009

Golf and Corporate Jets

In light of the furor regarding corporations on the dole spending money on gold tournaments, I thought that I would post a part of my discussion of golf from my book: The Consfication of American Prosperity.

David Yermack of New York University's Stern School of Business produced a paper with the delightful title "Flights of Fancy: Corporate Jets, CEO Perquisites, and Inferior Shareholder Returns," in which he investigated the relationship between this particular luxury and corporate efficiency. He found that the cost of corporate jets for CEOs who belong to golf clubs far from their company's headquarters is two‑thirds higher, on average, than for CEOs who have disclosed air travel but are not long‑distance golf club members (Yermack 2004).

Yermack's paper reported that "more than 30 percent of Fortune 500 CEOs in 2002 were permitted to use company planes for personal travel, up from a frequency below 10 percent a decade earlier." Since Yermack's study, the problem has continued to escalate. Between 2004 and 2005, the reported value of personal use of corporate aircraft increased 45 percent, according to government filings of the 100 largest public companies (Fabrikant 2006).

Not surprisingly, Raghuram Rajan, the chief economist of the International Monetary Fund, gallantly came to the defense of the corporations. He suggested, without the slightest hint of humor, that these expenditures may have actually been justified because they encouraged executives to be more efficient (Rajan and Wulf 2004). This justification does not seem particularly credible since Rajan's study did not bother to distinguish between planes used for business or personal purposes, including use by retired executives.

In fact, the personal use of corporate jets does not seem to be correlated with profitability at all. Of course, some of the firms that supply their executives with corporate jets for personal use are successful, despite such wasteful excesses, but the use of corporate jets is correlated with poor performance. According to Yermack: "Firms that permit personal aircraft use by the CEO under‑perform market benchmarks by about 4 percent or 400 basis points per year, after controlling for a standard range of risk, size and other factors" (Yermack 2004).

A Wall Street Journal article entitled "JetGreen" followed up Yermack's report. It described corporate jets "as airborne limousines to fly CEOs and other executives to golf dates or to vacation homes where they have golf‑club memberships" (Maremont 2005). Although executives must report such personal use of corporate jets as income, they rarely disclose anything near the full cost. Besides, hiding golfing expeditions as business activity is not particularly difficult.

Golf Digest provided further evidence of the negative consequences of corporate jets. Every two years, this publication informs the golfing public about who are the best golfers among executive leaders. A USA Today reporter investigated whether their companies performed as well in the business world as their leaders did on the golf links. The results were not surprising: of the companies run by the top 12 golfers two‑thirds fared worse than the Standard & Poor's 500 index in 2006 (Jones 2006).

Of course, high‑level corporate executives enjoy many other perks besides free travel, including the provision of luxury boxes at sports stadia, chefs, yard work, and a multitude of other benefits that ordinary people would have to pay for on their own, if only they could afford them. New York Times business columnist, Gretchen Morgenson, described the excesses of Donald J. Tyson, former chairman of Tyson Foods, which ranged from the personal use of corporate jets to housekeeping and lawn care. Echoing Leona Helmsley, she appropriately titled her article "Only the Little People Pay for Lawn Care" (Morgenson 2005).

1 comment:

Shag from Brookline said...

This is a reminder to read Brandeis' "Other Peoples' Money" that my classmate loaned me a month or two ago.