Thursday, March 31, 2011

Important New SEC Ruling Offers Diversified Shareholder Responses To Corporate Election Spending

Sanford Lewis,  Attorney

Shareholders have won the right to seek an annual proxy review and vote on a company's  political spending, as a result of a new SEC decision. The SEC Staff, for the first time, allowed a shareholder resolution seeking shareholders' say on political spending (in a decision known as a “no action letter”).  The proposal will appear on the Spring 2011 proxy of the Home Depot.  The decision opens new options for shareholders seeking to take action in the aftermath of Citizens United,  portending diversified approaches to shareholder interventions beyond the predominant approach of seeking better disclosure.

Corporate Spending In Elections:  A Crisis Of Legitimacy
Citizens United v. Federal Election Commission, the controversial Supreme Court   “corporate free speech” decision in January of 2010, opened the floodgates to additional corporate  spending  in the political process, including  corporate funding of political advertising for and against candidates up to the day of an election. A baseline issue is the legitimacy of any corporate involvement and spending in the political process. The argument that giant corporations have essentially the same free speech rights in the political process as individuals, or even as groups of individuals, has met with enormous outrage and concern. A corporation is not a mere group of individuals  but a legally created moneymaking machine, and as such will warp our political process to the extent it is allowed to be a player.   

            Compare this with a recent Supreme Court decision, ATT v. FCC,  finding that corporations do not merit the same level of “privacy” protection as individuals, and the underlying notion of a corporation's participation in politics as if it were a "person" or "group of persons" is even more incongruous. 

Potential Interventions by Shareholders
Although this author believes more extensive reforms are needed to undo the damage to our political system caused by Citizens United, it also seems possible that shareholders could help rein in the worst abuses of companies in the new post Citizens United political environment.  The proposal cleared by SEC staff and filed by the Boston-based NorthStar Asset Management  (hereafter NorthStar)  asks the Board of Directors of  Home Depot  to annually include in its proxy statement the company’s policies on  political contributions,  a report on spending  for the past year, and anticipated spending for the next year. Shareholders would then vote on whether they support those policies and plans. In addition, NorthStar recommended in its proposal that the proxy also analyze whether the spending is  consistent with  the company’s values  and whether it poses risks to  the company’s brand, reputation, or shareholder value.

 In the aftermath of Citizens United,  companies can put corporate money into ads supporting candidates, even if the company’s own shareholders might support different candidates. There is little accountability for this spending.  One successful approach until now has been for shareholders to  file resolutions seeking better disclosure of corporate political spending.  This approach has been successfully advocated by numerous investors and the Center for Political Accountability.

However, now the specifics of spending on particular candidates and issues,  issues regarding risks to the company's reputation, and congruency of that spending with the company's stated values are also also fair game for debate on the proxy, culminating in a shareholder vote on those policies.  Home Depot had argued to the SEC that a vote on company spending would involve an impermissible intrusion of shareholders on the “ordinary business” of the Company. 

The company’s Senior Counsel Stacey Ingram asserted “Decisions as to the appropriate future recipients of the Company's political contributions are ordinary business decisions made by management as part of its day-to-day operation of the Company…. The ability to make such decisions is fundamental to in spending ability to control the operations of the Company and, as such, is not appropriately delegated to shareholders.”  However, under SEC and judicial precedents, shareholder proposals which present a “significant social policy issue” are not excludable even if they may otherwise intrude on ordinary business.  In ruling in favor of allowing the proposal, the staff has essentially determined that after  Citizens United, corporate political spending is a significant social policy issue and shareholders  can seek to have  input on management’s decisions. This contrasts with prior staff decisions finding that corporate charitable spending in general is excluded from shareholder oversight.

NorthStar  has particular concerns  about the failure of  Home Depot’s political spending to live up to its policy  against discrimination on account of  sexual orientation. Home Depot's disclosed PAC contributions include donations to candidates whose actions and opinions seemed adverse to  that policy. The financial and reputation risks associated with political spending were highlighted last year when the Target Company became the subject of a boycott campaign as a result of their support of anti-gay rights candidates.
Home Depot is cited on the Center for Political Accountability website as a "corporate leader" because the company discloses certain information and have adopted policies advocated by the Center. 

With the SEC decision,  the annual corporate meeting process can now become a battleground, not only on disclosure of spending, but also the financial risks to the company from that spending,  the congruency of  the spending with a company's stated values, and with investors' interests both as shareholders and as citizens. Ultimately, shareholders could vote on whether they support the management's practices.

 The Opening for Diverse Approaches
 The Home Depot proposal cleared by the SEC is only one possible approach to addressing congruency, risks and shareholder approval processes related to corporate electioneering.  The significance of the decision is that it opens the way for many similar approaches to be explored by shareholders  in future proposals.

The  NorthStar resolution  allowed by the SEC would give shareholders  a nonbinding, advisory vote seeking approval of a majority of shareholders on the company’s spending. In contrast, legislation pending in Congress would make shareholders’ vote  to approve corporate political spending binding on the company.

One serious limitation of  seeking a shareholder vote is that a majority of institutional investors typically support whatever the management of a company thinks is appropriate. Simply establishing shareholder approval processes in the proxy may merely allow a rubberstamping of the management's political predilections. In contrast, citizen investors, and others who may represent only a minority of  a corporation's investors may represent a dissenting view–not wanting to see their political preferences as citizens overridden by their investments–and yet be unable to block the spending. Harvard Law Professor Lucian Bebchuk has argued that to protect the rights of dissenting shareholders, requirements for a supermajority (e.g. 75% ) vote in favor of election spending could be appropriate.

            May shareholder responses to corporate money in the political process go forth and multiply.   In the aftermath of Citizens United, we need all the experimentation and engagement that's possible to staunch the bleeding.

Sanford Lewis is an Attorney who represented NorthStar Asset Management Funded Pension Plan before the SEC in defense of the Home Depot proposal.

Monday, November 15, 2010

Can Shareholders Benchmark “Safety Culture”? More Learning from the Gulf Coast Oil Disaster

Sanford Lewis
Investor Environmental Health Network

In its preliminary examination of the causes of the Gulf oil spill disaster, the Presidential Commission appointed to investigate has tentatively concluded that the underlying cause of the incident was not that the companies involved placed cost-cutting over safety, but rather that there was a lack of “safety culture” and, perhaps, safety competence.

From what we know about the incident so far, it is apparent that multiple things had to go wrong in order for the disaster to have been triggered. Decisions were made, sometimes in a hurry and overriding certain safety concerns. For instance:

1. The morning of the explosion, there was a dispute between the rig operator and BP over BP’s plan to replace heavy mud, used to keep the well's pressure down, with lighter seawater to help speed a process that was costing an estimated $750,000 a day and was already running five weeks late. BP overrode the rig operator’s objections.

2. The lack of safety culture was indicated by an employee survey conducted by Transocean (the rig operator) about a month before the disaster. The company found that rig employees had a fear of reprisal if they reported unsafe conditions. For instance, “only 46.3 percent of participants felt that, if their actions led to a potentially risky situation (e.g., forgetting to do something, damaging equipment, dropping an object from height), they could report it without any fear of reprisal," according to a CNN account of the report.

The focus on safety culture by the Presidential Commission raises a challenging, difficult question for shareholders: Can companies be benchmarked to determine which ones have an effective “safety culture” and which are at greatest risk of causing the next catastrophe?

Learning from the BP Experience
Some past shareholder initiatives have proven ineffectual at providing informed answers to this question. As I analyzed in greater depth in a recent blog post, the BP experience is notable in demonstrating how sustainability reporting failed to provide transparency on fundamental issues of risk-taking and risk management. In 2005, for example, BP Global Reporting Initiative Sustainability Report laid out some excellent company goals and values:

Responsible. We are committed to the safety and development of our people and the communities and societies in which we operate. We aim for no accidents, no harm to people and no damage to the environment.

These goals were stated in the same reporting year in which the company experienced a disastrous refinery explosion in Texas City. The company asserted in subsequent sustainability reports that it had learned from and was correcting the hazards identified as a result of Texas City. However, a 2009 reinspection by the Occupational Safety and Health Administration (OSHA) found 439 “willful” violations, many considered gravely serious, because the company had not addressed issues identified in the aftermath of the 2005 disaster. In particular, the agency noted the failure of the company to identify which instrumentation was critical to safety in its complex Texas City refinery. Despite these continuing problems, the 2009 sustainability report, issued after the OSHA allegations, continued to assert the notion of steady progress and commitment to safety at BP. Then, in 2010, OSHA fined the company $50 million for these continued violations -- by far the highest penalty ever assessed by the agency.

One cannot find sufficient information in BP sustainability reports to recognize that its safety culture has been seriously lacking, or to allow comparison with the culture of other companies. The GRI’s Guidance for preparing sustainability reports places a great deal of emphasis on the need for companies to “Describe the Management Approach.” This offers managers an opportunity to paint a flattering corporate self-portrait, setting forth their rendition of corporate goals, policies, and practices. It may encourage the development of two separate, disconnected cultures, a reporting culture that states some admirable goals, and a more true to life operational culture that may perpetuate the worst tendencies and lack of focus on safety.

Potential investor inquiries to probe a company’s safety culture.
In 2009, the SEC authorized investors to file resolutions seeking evaluations of risk to companies associated with significant policy issues. (Staff Legal Bulletin 14E.) Here are a few initial suggestions for how shareholders might use the “risk evaluation” opening provided by the SEC to probe “safety culture”at companies where safety concerns may be prominent:

1. Disclosure of ongoing regulatory enforcement allegations.
Existing SEC requirements for disclosure in the 10-K regarding regulatory enforcement proceedings provide too little information, too late. Even as weak as it is, the existing requirement to disclose anticipated environmental penalties in excess of $100,000 (Reg S-K, Item 103), has been poorly enforced by the agency. The recently enacted Financial Reform Act includes more stringent disclosures of regulatory allegations such as serious enforcement actions, orders and penalties -- but only for coal mining companies. This legislation could provide a model for investors to request safety risk reports, including disclosure and breakdowns of:
• The number of major violations once they are alleged by regulators in the past year;
• Orders to close facilities or withdraw products based on health and safety concerns;
• Suspensions of existing or new permitting for any period of time based on health and safety concerns; and
• Cumulative amounts of penalties paid.
The SEC staff should allow such resolutions since such reporting would help to flag and benchmark very significant risks related to big safety concerns at some companies; as such, it would be inappropriate for the staff to categorize such requests as excludable, even though legal compliance on routine matters can itself be seen by the SEC as excludable “ordinary business.”

2. Responses to emerging scientific literature findings regarding catastrophic risk.
Disclosure of catastrophic risks identified in scientific literature are inconsistent. Studies warned of the risks of deepwater drilling, such as technical problems and blowouts, warranting an industry task force. Shareholder requests for risk evaluation reports could include requests for a report that summarizes:

• peer-reviewed scientific studies indicative of potentially catastrophic risks of products or activities ( and to treat such studies in a precautionary manner, so that they are disclosed even where there may be some remaining scientific debate or uncertainty);

• profiles of the severity and scale of the potential problem; and

• measures being taken by the company to minimize adverse impacts or maximize business opportunities associated with the catastrophic risk issue.

3. Anonymous surveys or independent audits probing employee safety culture
In a recent conversation with Shelley Alpern of Trillium Asset Management, she asked whether shareholders could request reports from companies that lead to direct monitoring of the safety culture by surveying a company’s employees. As instructively conducted at Transocean, employee safety culture surveys ask employees to report on various attitudes and contingencies of safety culture. Any shareholder request for such surveys should emphasize the need for such employee surveys to be conducted with genuine assurance of anonymity, and also to evaluate whether employees believe they can report unsafe conditions, and even cause operations to stop, without fear of reprisal.