Friday, October 2, 2015

Response to Proposed Concept of a Corporate "Statement of Significant Audiences"

A recently published paper by Harvard Business School's Robert Eccles and Tim Youmans  proposes that all publicly traded corporations be required to publish  an annual “Statement of Significant Audiences.”  The purpose of such a publication is partly to debunk the notion that the fiduciary duty of the Corporation extends only to its shareholders and its profitability.

 Needless to say, that subject is a heavily contested territory. This author and many of his legal clients and colleagues believe that the correct analysis is that the Corporation  and its Board of Directors owe a fiduciary duty to society, to many stakeholders, not just to the shareholders.

The concept of publishing an annual statement of significant audiences is in line with similar requirements under the Global Reporting Initiative to annually report on the company's stakeholders.  The annual statement of significant audiences proposed by the authors is part of their overall effort with others to establish integrated reporting by corporations, in which environmental and social issues appear alongside typical SEC financial reporting requirements in a single integrated report.  They assert in the article that identifying the "significant audiences" of the company is just as relevant to an SEC form 10-K or 10-Q as it is to an integrated report.

This proposal represents a useful rebuttal to often overstated and damaging endorsements of shareholder primacy in defining the scope of board and management fiduciary duties. For instance, when it comes to the problem of climate change and the catastrophic long-term damage posed to society, an overweening emphasis on  shareholder primacy and the lack of accountability to future generations of shareholders and non-shareholders arguably is at the heart of decisions by certain major oil companies to blindly focus on fossil fuel development with appallingly little concern for the long-term implications to other audiences who should have substantial concern, and to whom the company owes accountability.

While the Statement of Significant Audience  idea is meritorious and should be of interest to  the growing number of NGOs and investors who agree with this take on the Corporation and accountability to its stakeholders, unfortunately the paper extensively refers to the corporation as a "legal person." For instance,  the article states:

The objective of the corporation, as a separate and potentially immortal legal person, is simply to survive and, if possible, to thrive. 

Attaching the statement of significant audiences to the notion of corporate personhood represents unnecessary baggage. As stated in the dissent by Justice Stevens in Citizens United v. Federal Election Commission
It might also be added that corporations have no consciences, no beliefs, no feelings, no thoughts, no desires. Corporations help structure and facilitate the activities of human beings, to be sure, and their “personhood” often serves as a useful legal fiction. But they are not themselves members of “We the People” by whom and for whom our Constitution was established.                                                                                                      
Many shareholders, individuals and organizations that  could be natural supporters of the concept of a statement of significant audiences may find the references to corporate personhood to be a nonstarter. There is a  substantial effort  within those “significant audiences” to revise or eliminate the  confusing concept of corporate personhood, including through constitutional amendment. For instance, S.J.Res.18  sponsored by Sen. Tester (D-MT)  proposes an amendment to the Constitution, known as the People’s Rights amendment, would specify:
“Section 2. The words people, person, or citizen as used in this Constitution do not include corporations, limited liability companies or other corporate entities established by the laws of any State, the United States, or any foreign state, and such corporate entities are subject to such regulation as the people, through their elected State and Federal representatives, deem reasonable and are otherwise consistent with the powers of Congress and the States under this Constitution.”
A state-by-state effort is underway to support such a constitutional amendment. For instance, in Washington State,  the organization WAmend is pursuing a Constitutional amendment to clarify that it should be citizens, the living breathing "We the People" meant by the founders — not corporate entities—that are entitled to the rights enshrined in the Constitution.

I would encourage advocates of the "statement of significant audiences" to extricate unnecessary references to corporate personhood. In doing so, they might find greater buy-in by natural advocates and allies for the concept.

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Sanford Lewis is an attorney  whose clients include institutional investors,  social investment firms and nonprofit organizations. His practice is focused on shareholder proposals, shareholder rights and improving corporate environmental and social disclosure requirements of the Securities and Exchange Commission. Mr. Lewis was co-author and lead researcher on The Rose Foundation paper, “Fooling Investors and Fooling Themselves: How Aggressive Corporate Accounting and Asset Management Tactics Can Lead to Environmental Accounting Fraud.” He is also a documentary filmmaker.  Mr. Lewis has a BS in Environmental Studies and Urban Communications from Cook College, Rutgers University, and a JD from the University of Michigan Law School.

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.