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27 January 2020
In July, Representative Carolyn Maloney contacted SEC Commissioner Robert Jackson to solicit his views on legislation that would require public companies to disclose their corporate political spending. Jackson has now responded. In his view, the absence of transparency about political spending has led to a lack of accountability, allowing executives to "spend shareholder money on politics in a way that serves the interests of insiders, not investors." But because investors typically put their money into mutual funds and other similar investment vehicles, their voting rights are typically exercised, not by the investors themselves, but instead by these institutions on their behalf—and most often not in sync with the surveyed preferences of investors: "while ordinary investors overwhelmingly favor transparency in this area, the biggest institutions consistently vote their shares to keep political spending in the dark." And, he charges, it's not just corporations that are opaque about their own political spending—institutional investors are likewise opaque about their votes against shareholder proposals for spending disclosure.
Jackson's views should hardly be surprising given that, before he joined the SEC, he was one of a group of academics who spearheaded a 2011 rule-making petition requesting that the SEC propose rules requiring disclosure of the use of corporate resources for political activities. Here is a link to a 2013 video segment of the PBS Newshour showing a debate between Jackson and former SEC Commissioner Paul Atkins about the rulemaking petition. Although the petition received over 1.2 million letters in support, as discussed in this PubCo post, then SEC Chair Mary Jo White was firmly against any rulemaking on the topic, contending that the SEC should not get involved in politics. (But isn't not acting also political?) White faced criticism for her position from two former SEC Chairs and one former Commissioner, who politely berated (well, maybe not so politely) her failure to take action on the rulemaking petition. (See this PubCo post.) And in 2015, Senate Dems sent a letter to White adding their voices "to the many who have expressed frustration and disappointment that the SEC decided to remove this issue from its regulatory agenda entirely." (See this PubCo post.) As discussed in this PubCo post, this PubCo post and this PubCo post, Congressional Republicans have long sought to prevent the use of SEC appropriations for adopting requirements for political spending disclosure, adopting riders to government funding legislation to block any regulation. (Not that the SEC was addressing the issue anyway.) After the Dems became the majority in the House, they introduced H.R. 1053, which would direct the SEC to issue regs to require public companies to disclose political expenditures in their annual reports and on their websites. Apparently, Maloney has plans for other legislation that would give shareholders oversight of corporate political spending. But in the absence of regulation, some proponents of political spending disclosure have turned instead to private ordering, often through shareholder proposals. So far, those proposals have rarely won the day. And the reason for those failures Jackson attributes largely to the absence of support from large institutional investors.
While the Center for Political Accountability has found some increase in the levels of voluntary disclosure of corporate political spending, especially among the S&P 500, overall, the numbers remain relatively small. And even those increases may be attributable in part to shareholder engagement. According to this press release from CPA, the most recent annual CPA–Zicklin Index, a non-partisan "scorecard" from CPA and the Zicklin Center for Business Ethics Research at Wharton, this past year saw the largest year-to-year increase in top scoring "Trendsetter" companies, now numbering 73, an increase from 57 last year. Further, the number of companies with improved scores of 50 points or more grew from eight last year to 16 in 2019. Among the S&P 500, 229 companies scored in the first and second tiers (100% to 60%), and, given turnover in the make up of the index, "399 companies have remained constant members since 2015. The average overall score for these 399 companies has continued to improve, from 41.6 in 2015 to 53.3 this year." In addition, this year, "60 companies had substantive conversations with CPA about adopting or strengthening political disclosure and accountability policies." CPA observed that shareholder engagement played a substantial role: "Of 16 companies receiving the highest scoring increase since 2018 (of 50 points or higher), shareholders engaged 12. For the 21 companies whose scores increased by 40 points or more, shareholders engaged 15. For all five years that the Index has evaluated the S&P 500, there has been a strong positive correlation between shareholder engagement and a company's Index score."
In response to the request from Maloney, Jackson's staff performed additional analyses of investor interest in corporate spending on politics with the following findings:
"First, the case for requiring disclosure of corporate political spending is strong. Today, corporate executives are free to spend shareholder money on politics in a way that favors insiders' interests over investors'—for example, by directing spending toward causes that executives personally support. As in other areas where executives' interests conflict with those of the company's owners, investors can only hold insiders accountable for the spending of shareholder money on politics if that spending is disclosed.
"Second, although over 70% of ordinary American investors favor disclosure of political spending, their shares are nearly always voted against proposals to require transparency. The reason is that some institutions managing Americans' savings have chosen to vote against shining light on corporate political spending. Those institutions provide investors with either vague or nonexistent disclosure of that choice, raising the concern that investors don't understand how their money is being voted when it comes to corporate spending on politics. The legislation you asked me to review would give shareholders oversight of corporate political spending; it is crucial that ordinary investors understand how the institutions who manage their money would use that power."
As expected, Jackson strongly supports legislation mandating political spending disclosure; in his view, the absence of SEC rules means that investors are largely left "without information about how their money is spent on politics." But compounding that problem, Jackson says, is the lack of transparency on the part of some institutional investors, which "consistently vote American families' money to keep corporate political spending in the dark, and I am concerned that investors are unaware of that fact. That's why today I'm calling upon those institutions to tell investors where they stand on transparency of corporate spending on politics."
Jackson's views also seem to line up with those of former Delaware Chief Justice Leo Strine expressed in a 2014 paper. There, Strine (with his co-author) observed that Citizens United is premised on the idea that shareholders are able to "constrain corporate political spending and that corporations can legitimately engage in political spending." But, given the "separation of ownership from ownership" that currently prevails, that idea is not necessarily valid: currently, most shareholders invest through "mutual funds under 401(k) plans, cannot exit these investments as a practical matter, and lack any rational ability to influence how corporations spend in the political process." What's more, the impact of Citizens United is so profound that it calls into question the prevailing theory in Delaware that the purpose of corporations is just profit maximization for shareholders, and accordingly, boards need not consider the interests of other stakeholders. That theory is premised on the idea that shareholders invest for "financial gain, and not to express political or moral values"; therefore, boards "should focus solely on stockholder wealth maximization and non-stockholder constituencies and society should rely upon government regulation to protect against corporate overreaching….Because Citizens United unleashes corporate wealth to influence who gets elected to regulate corporate conduct," Strine argued, "and because conservative corporate theory holds that such spending may only be motivated by a desire to increase corporate profits, the result is that corporations are likely to engage in political spending solely to elect or defeat candidates who favor industry-friendly regulatory policies, even though human investors have far broader concerns, including a desire to be protected from externalities generated by corporate profit seeking." As a result, ironically, Citizens United "strengthens the argument… that corporate managers must consider the best interests of employees, consumers, communities, the environment, and society—and not just stockholders—when making business decisions." If not, Strine concludes, "one form of nonhuman citizen that as a matter of reality controls much of the wealth of actual humans will have the ability to imbalance public policy, in a manner that is inconsistent with social welfare. Put plainly, if corporations are regarded as having equal rights with human beings, without regard to the real-world differences between for-profit corporations and human beings recognized by and built into the design of conservative corporate theory, their managers must have the legal right to act with conscience and a regard for the full range of concerns that animate flesh-and-blood citizens of the United States."
According to a 2013 study by Jackson, just eight third-party intermediaries—none of which disclosed the source of their contributions—spent $1.5 billion of investor money on elections over six years. While there is some mandatory disclosure of federal election spending, it is not designed for investors and state spending is not required to be disclosed, with the result that "most public-company political spending occurs under investors' radar." Particularly worrisome to Jackson is that executives' interests in political spending are not necessarily aligned with those of shareholders and may even advance insiders' preferred political views. Citing two studies, Jackson asserts that "studies show that political spending is associated with corporate governance problems that affect firm value." Disclosure, he argues, "would help ensure that corporate political spending is aligned with the interests of investors—not corporate insiders."
Another risk potentially arising out of political spending is reputational, which could have an adverse impact on the company's relationship with its employees, customers and shareholders. CPA's 2018 Collision Course report looked at just such "risks companies face when their political spending and core values conflict." These risks seem to be exacerbated by the current political polarization—the "incendiary new political and digital media environment." To the extent that companies enter the fray, "it leads to a heightened risk for companies: Will their actions align with their core values and brands? Increasingly, this question is being raised publicly about scores of U.S. corporations whose underwriting of political groups and trade associations contributes to outcomes that appear to conflict with core company values and messaging."
Currently, according to the report, inconsistencies between large contributions to various election campaigns and through third-party groups and publicly espoused corporate policies and core values are a magnet for media and other watchdogs. Increases in corporate engagement, together with the heightened polarization of the political environment "means these companies are highly vulnerable to reputational and financial risks, even if these risks have not fully materialized yet…. Media and watchdogs are giving increasing scrutiny to cases when company political money and core values appear out of alignment." Examples cited were public expressions of support for anti-discrimination practices, while at the same time funding legislators that enacted the discriminatory legislation, or expressions of support for the Paris Climate Accord while funding climate deniers. These contradictions can appear hypocritical and may ultimately be toxic for the company's reputation, potentially leading to backlash.
The scarcity of political spending disclosure has made it "the second-most common subject of shareholder proposals at U.S. public companies. Although shareholder support for these proposals has doubled over the last decade, and given that the overwhelming majority of investors favor disclosure of corporate political spending, support for these proposals is lower than investor preferences would suggest." Why is that? The reason, Jackson contends, based on a study by his office of the "voting data for hundreds of the largest institutional investors over the last fifteen years," is that "three of the largest institutions in America almost never support proposals that would require disclosure of corporate political spending." More specifically, according to Jackson's data, they vote in favor less than 5% of the time, "regardless of the company or situation." (Of course, it's particularly ironic that institutional investors have, for the most part, shied away from political spending proposals, especially in light of their expressed concern with sustainability. See, for example, this PubCo post and this PubCo post. After all, corporate political spending could well be devoted to purposes inconsistent with those sustainability goals.)
Nevertheless, in this article from CPA, the authors witnessed in 2019 upticks in both shareholder support for disclosure proposals submitted by CPA (and its "shareholder partners") and the number of shareholder proposals withdrawn as a result of agreements reached with companies for disclosure of political spending and board oversight. This proxy season, 33 proposals on political spending disclosure submitted by CPA and its partners went to a vote, with an average vote in favor of 36.4%, an increase from 34% last year (18 proposals) and 28% in 2017 (22 proposals). More specifically, two proposals actually received majority votes, while 11 were in the range of 40% to 50% and 12 were in the range of 30% to 36%. And it's worth noting here that boards often feel compelled to respond to shareholder proposals that receive a significant vote in favor, even if not a majority. In addition, proposals submitted to 13 companies were withdrawn as these companies reached agreement for spending disclosure and adoption of oversight policies, compared with three in 2018 and seven in 2017. (See this PubCo post.)
Not only do these institutions fail to support political spending proposals, contrary to the views of the majority of investors, Jackson argues, they generally don't disclose their proxy voting policies on this issue. To determine if investors were aware of the voting pattern, Jackson looked at the institutions' proxy voting guidelines and concluded that "in most cases, these institutions offer little or no transparency to ordinary investors about their voting record on corporate political spending." For example, in one case, although the institution uniformly voted against over 800 political spending proposals, no voting policy was disclosed on this issue, raising the concern to Jackson that investors were unaware of these voting decisions. Only BlackRock "had an explicit proxy voting policy regarding corporate political activities." In this context, for a "thoughtful and forceful case for why these voting patterns can raise concerns about the legitimacy of corporate spending on politics," Jackson refers us to another paper by Strine.
The title of above-referenced 2018 paper by former Delaware Chief Justice Leo Strine, "Fiduciary Blind Spot: The Failure of Institutional Investors to Prevent the Illegitimate Use of Working Americans' Savings for Corporate Political Spending," communicates the bottom line pretty clearly. While Strine congratulates the Big 4 large institutional investors for recognizing "that unless public companies act in a manner that is environmentally, ethically, and legally responsible, they are unlikely to be successful in the long run," he chastises them for continuing "to have a fiduciary blind spot: they let corporate management spend the Worker Investors' entrusted capital for political purposes without constraint." (In the paper, "Worker Investors" are American workers that, through 401(k) and 529 plans, must invest largely in mutual funds to save for retirement and college and whose capital is effectively "trapped" until their retirement.) In effect, the Big 4 have essentially "abdicated" by refusing "to support even proposals to require the very disclosure they would need if they were to monitor corporate political spending." As Strine sees it, the Big 4 have a lot of clout and usually win the day when they "flex their muscles." In support of that point, Strine cites a "recent study of 25 political spending disclosure proposals [that] found that only one passed. But if the largest stockholders had voted for these proposals, 15 more would have passed—over half the proposals would have gained majority support if just the largest investors—including the Big 4—supported them. By deferring to management, the Big 4 have handcuffed their own ability to oversee political spending by denying themselves the very data they need to do so."
Why is it so important to monitor corporate political spending? To Strine, "unconstrained corporate political spending is contrary to the interests of Worker Investors. Precisely because Worker Investors hold investments for the long term and have diversified portfolios that track the whole economy, political spending by corporate managers to tilt the regulatory playing field is harmful to them, as humans who suffer as workers, consumers, and citizens when companies tilt the regulatory process in a way that allows for more pollution, more dangerous workplaces, less leverage for workers to get decent pay and benefits, and more unsafe products and deceptive services." As a result, Strine contends, the Big 4 need to "open their fiduciary eyes … and vote to require that any political spending from corporate treasury funds be subject to approval of a supermajority of stockholders….Because of their substantial voting power, the support of the Big 4 would ensure that this check on illegitimate corporate political spending would be put in place and thus make an important contribution to restoring some basic fairness to our political process." (See this PubCo post.)
Most recently, Strine has advocated curbing corporate political spending in the absence of 75% shareholder approval (see this PubCo post).
For further information on this topic please contact Cydney Posner at Cooley LLP by telephone (+1 415 693 2000) or email (firstname.lastname@example.org). The Cooley LLP website can be accessed at www.cooley.com.
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