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.