Best Practices: Annual CEO Expense Audit

I’ve started a new category on my blog called “Best Practices.” These are going to be posts inspired by my experiences with various companies that I feel are above and beyond the normal activities you’d expect. The first one comes from Matt Blumberg, the CEO of Return Path. Earlier this week the board received an email from him that included the following:

“Although [our CFO] approves my expenses in our accounting system, inspired by Mark Hurd, I decided it would be a good idea to add a level of transparency to you in terms of my expenses.

To that end, I’m doing two things:

  • I’ve asked our auditors to include some analysis/testing of my expenses in this year’s audit
  • Attached, please find a spreadsheet which details all expenses, with a summary tab that has the overall picture and a few explanatory notes

Trash or treasure, as they say, but please feel free to ask any questions or poke any holes you’d like.  I can assure you that I’m pretty disciplined about expenses (both in terms of not being profligate and in terms of not abusing company money for personal use), but I did think it would be good housekeeping for you to have visibility.”

To a person, we responded that while unnecessary, this was a nice gesture of transparency. The spreadsheet that Matt sent around had every expense item he was reimbursed for in the year. The summary was helpful for putting it all in perspective, but I could look and see where (and with whom) Matt ate dinner, which hotels he stayed in, how much he paid for plane flights, and what he charged to the company as miscellaneous expenses.

I thought about it more and decided it was an awesome display of trust. I have immense respect for Matt, his leadership, and his management skills. But more than that, I’d go to the ends of the earth to do anything for him. Unilateral, unexpected gestures like this one just reinforces that for me. So, more than just transparency, this best practice increases the level of trust between a CEO and his board.

  • Agreed 100%

    Brad, do VC partners provide this kind of transparency to LPs?

    • VC’s don’t. However, as I’m sure you know, the dynamic is different. In the
      case of VC’s, there is typically a fixed management fee that is an absolute
      number on an annual basis. It doesn’t matter whether it’s spent on salaries,
      office space, fixed assets, or expenses. So, in the VC case, there isn’t a
      variable expense component.

      Now, you can argue that within a company, a CEO should get an “expense
      budget” and as long as they are below it then there should be no scrutiny on
      how it’s spent. In fact, in almost all cases, there is no budget, so CEO’s
      just expense things based on whatever the company expense policy is. The
      board generally assumes this is fine and trusts the CFO (or whoever approves
      the CEO’s expenses) to verify.

      In my firms case, each partner has a fixed expense budget. You can spend it
      on whatever you want – if you go over the overage comes out of your own
      pocket. We have full transparency between the four partners – anyone can
      review each other’s expenses. So – while this isn’t LP transparency, as
      partners we are being transparent to each other and have a rule set that
      makes it easy to deal with.

      • That all makes total sense. But just so I understand, I think what you are saying is, while LPs know how much GPs are spending (that is, how much they are collecting in management fees, since I assume no GP has ever returned “excess” management fees to LPs) , LPs have zero information on what GPs are spending the money on. There is essentially no transparency, other than that one aggregate annual number.

        • Correct.

          • Dave

            Brad–are there expenses you pass directly to the LPs, such as consulting fees, legal fees for deals, etc. or are all expenses covered out of the management fee? I assume if you pass expenses to the LPs there is full transparency. The direct expenses are different than expenses that come out of management fees, since excess management fees simply become “profit” (not quite the right term but the one that comes to mind).

          • Actually, good point.

            There are fund expenses separate from the management fee. They are generally
            only audit, tax, and direct legal for the funds – the rules are detailed in
            the agreement (called the LPA – limited partner agreement) and we’d happily
            disclose them on a line item basis if asked.

            As a firm, we don’t charge back any deal related expenses to the fund. These
            come out of the management fee we charge or in some cases are reimbursed to
            us by the companies.

            We don’t ever charge additional fees to the companies (e.g. consulting, deal
            fees, etc.) If we receive any direct compensation from the companies (very
            rare – but sometimes we end up with options for serving on a board) we
            reduce the management fee by the amount of the direct compensation if it has
            any value.

          • Dave

            Thanks Brad. Appreciate the information.

      • Greg Hao

        Brad, while I applaud Matt’s move towards transparency, I’m having a hard time seeing why this sort of action deserves such applause and seeming praise. A CEO is still at the end of the day an employee of the company and as such, albeit a highly compensated one, but an employee nonetheless and I don’t know any other employee whose expenses wouldn’t be scrutinised by the company.

        • In 15 years of investing, I’ve never heard of a CEO simply emailing the full
          line item detail of his expenses to the full board of directors and the
          auditors saying “here it is.”

          Every company I’ve been involved in has a process for the CEO getting his
          expenses approved, but they are almost always approved by the CFO or someone
          else that reports directly to the CEO. While generally fine, there is
          obvious potential pressure here on the CFO (or whoever approves the

          I thought this was a unique way to address this, as did several of the other
          Return Path board members, who are all very experienced directors.

          • Greg Hao

            I’m curious how CEO expense is handled at other companies that you’re on the board of. Does his/her expense get broken out or is it lumped into overall operating expense?

            Certainly I don’t believe that there’s a great percentage of CEOs out there who’re squeezing an extra orange juice into their expense report but it almost sounds like the typical CEO expense report gets rubber stamped?

            While this level of transparency to the board may not be new, I am actually mildly surprised that auditors aren’t privy to, and in fact er.. audit, to this sort of information

          • Presumably you are aware of the HP / Hurd scandal around expense reports –

            In general, auditors don’t audit expense reports. Don’t get me started on
            what auditors actually do.

            I don’t think I’ve ever seen a CEO’s expense report as a line item anywhere
            – it’s just spread across operating expenses.

            I can think of only one case where this was an issue that resulted in the
            termination of a CEO. In that case (which was over a dozen years ago), the
            CEO was doing some sketchy stuff and one of the board members unilaterally
            decided to dig in and review his expense reports. It wasn’t pretty what was

          • Greg Hao

            RE: Hurd, hence the “great percentage” in my comment previously and not “all”. And it is precisely with Hurd (and honestly, many other expense reporting scandals in mind) that I’m surprised auditors do not regularly audit this portion of the business.

            And I think your last ‘graf sort of hit the nail on the head, there has to be an assumption of trust between the relationship of a chief executive and their board; without that, I don’t think any level of line item analysis would do any good. I think there is a difference between transparency and trust.

            For example, a while ago, Maloney & Porcelli came out with a tongue in cheek website ( which generated receipts for you. Now, this is obviously a joke but if a CEO submits false receipts, yet is “transparent” in doing his line-item reporting to the board, then what good does that achieve? There is already clearly a baseline of trust between the board of Return Path and its CEO; without it, I daresay you wouldn’t be refreshed in his candor but almost demand a line-item report.

  • Dave

    That is a genius idea. Matt Blumberg should be commended for this level of tranparency. What a great, simple way to build real trust with the Board.

  • This is great. I’m adding this to my todo list as Jexy grows.

  • Good stuff.

    Do you know what Matt uses to facilitate this? You mention a spreadsheet, but I’m curious whether there’s a mechanism or service he uses on an ongoing basis to make this both easy to manage (i.e. the expenses get into the right account or column) and to share.

    • The data I saw was delivered via a spreadsheet but I’m sure Return Path has
      an expense management system since they have 200+ employees. I’ll check.

      • great, thanks

        Edit: expense *capture* is a pita, as you know. I currently use Neat Receipts (+ their scanner), and this helps w/ a simple expense report, but it does nothing to get those into the accounting system.

      • J.D. Falk

        I’m one of those employees, and yep, we have an expense reporting system. It’s ugly and non-intuitive, but that’s almost always true of that kind of site/service.

        (Business opportunity for someone, perhaps?)

  • Brad, great best practice and good to know. Trust is leverage. Trust is advantage. Trust is a measure of potential, specifically a measure of what you and others will do for each other. Trust is key. Trust extends from your organization to your customers out to the markets you deal in. If your customers trust you, big outcomes become possible.

    I’ve spent the last 10 years doing trust-based adviser style consulting in big companies. I didn’t start out that way, I started as a hot-shot just out of the bubble making a ton of money and knowing how to solve big business problems. Over time, I realized the value in building, keeping and expanding trust relationships in business. I didn’t have to prove I knew everything, just that I knew how to take care of people that trusted me.

    If this sounds like “puff”, keep in mind when you’re working with people that it essentially boils down to “having their backs” and keeping their best interest in mind in nearly everything you do and say. Brad’s advice is really helpful in knowing that something as simple as transparency in expenses (read: trust you’re not a fool or egomaniac with their LP’s money) can be a big motivator in gaining support and building trust from the people most likely to help you succeed when you’re small.

    Alternately, keep in mind how expense transparency and decisions can build trust in your organization.

    If you fly full-fare first class while your team is crammed into economy in the back of the plane.

    If you have a fancy chair and office and your team does not.

    If you spend lavishly on entertaining colleagues or customers, but bring in cold pizza for your team.

    These kinds of little decisions can break trust in a team and decapitate your operation.

    That cascades into operational spending as well, but less in scope. My point is this; show people good judgment, not frugality. Be transparent and fair with others and you’ll win trust internally and with those you will need to depend on outside the organization.

  • I just had a very thorough discussion with my partners on the Topic. I like your CEO already ;-0

  • Jim McKinley

    I truly like the transarency concept and would have no problem sharing my expense reports with the board monthly. In that I spend usually 3 hours monthly assembling and recording the required information, which does not include details of miscellaneous expenses, which number another 20-30 items all under $20, I would not recommend adding an hour to do so. I beleive that my time is better spent. Perhaps if I had an assistant to handle the whoe report, I would more fully endorse this “Best Practice.”

  • Dave

    In today’s questionable economy and all CEO practices being under purview by Boards, Owners and fellow employees, any extra transparency is good at all levels and will instill a stronger sense of teamwork and participation in the company’s endeavors to hold a tighter bottom line and reduce unnecessary expenditures. The buck starts and stops with the CEO and they must be held to the same standard of accountability. Accountability or the lack there of is where the CEO becomes an asset or a liability to the company.

  • Rclark

    Another way to accomplish the same objective is to have an outside director who is on the comp committee approve expense reimbursements instead of the CFO. That is what I do. When I was a CFO I always found it a bit odd/awkward approving my boss’s expense reports especially given I was the type of CFO to say something if it was not kosher eg the “the second laptop” that was the Apple Airbook or whatever. The CEO won a couple but he was put on notice that it ain’t a rubber stamp.