Shareholder Activism in Connection with Political Spending

By Cydney Posner

And speaking of shareholder activism, what governance issue was the subject of a record 125 shareholder resolutions so far in 2012? Disclosure of political spending, according to research by the Sustainable Investments Institute, as reported in the following article in Institutional Investor, "Institutional Investors Demand Disclosure on Companies' Political Spending." Obviously, interest in this issue has intensified dramatically since January 2010, when the Supreme Court delivered its landmark decision in Citizens United. Although that case opened the spigots for corporate political spending, the Court had also explicitly endorsed – arguably premised the opinion on -- the concept that corporate political spending would be transparent: " ‘disclosure permits citizens and shareholders to react to the speech of corporate entities in a proper way.' " However, the article notes, to date, there has been little transparency because most companies "make their donations through organizations formed under section 501(c)(4) of the U.S. tax code (reserved for ‘social welfare groups') and section 501(c)(6) (for business associations, like the Chamber of Commerce) which don't require the public disclosure of their funders."

The article argues that the opacity of political spending by corporations has the potential to affect shareholder value. As a result, several major investors, concerned that decisions about political spending might ultimately hurt the bottom lines of their portfolio companies, have mobilized to eliminate anonymous corporate political spending. The article cites Target as an example of political spending gone awry, resulting in boycotts, protests and in-store sit-ins at Target stores nationwide. Accordingly, it is argued, shareholders deserve to know about the potential exposure to reputational risk of the companies in which they invest.

Shortly after the Citizens United decision was issued, several public employees' retirement funds and other institutional investors joined a campaign organized by the Center for Political Responsibility and the Council of Institutional Investors to write letters to the 427 companies in the S&P 500 that lacked disclosure policies on corporate political spending. A number of institutional investors also began to submit shareholder proposals. According to the article, one institution, the New York State Common Retirement Fund, filed 17 proposals focused on political disclosure this year alone and has reached agreement on disclosure policies with seven of them, including PG&E, Safeway and Kroger. The article also reports that the California State Treasurer has urged CalPERS and CalSTRS to develop their own formal policies on the issue of political spending by portfolio companies. He advised that "‘to accurately assess a company's sustainability, shareholders must be able to analyze whether political spending is consistent with the company's values… and whether it poses risks to the firm's brand, reputation or profitability.' He also cites studies — one from Harvard Law School and another from the University of Minnesota School of Management — that have found negative correlations between a firm's political spending and its returns and overall value." Both funds adopted policies in November in support of shareholder efforts to improve disclosure of political contributions.

In addition, in August 2011, a group of law professors filed a rulemaking petition with the SEC asking the SEC to require companies to publicly disclose their political contributions. So far, the SEC received a record 180,000 comment letters supporting the petition, and SEC Commissioner Luis Aguilar has indicated his support for the petition.

Some investors have gone beyond a simple disclosure proposal, opting instead to propose that companies refrain altogether from political spending that is funded directly from the corporate treasury: this proxy season, "socially responsible investment firm Trillium Asset Management filed the first shareholder proposal by an institutional investor that asks a company to completely refrain from channeling funds from the corporate treasury to political ends. The targeted company was Bank of America….On the resolution's first go-round, support was low — 4.8 percent voted in favor of Trillium's no-spending resolution at Bank of America — much lower than the average support of roughly 25 percent garnered so far this year by resolutions asking for more disclosure on political spending….[S]upport [is expected to] rise as investors come to understand that such a resolution doesn't target lobbying or spending by corporate PACs at all — just the money that comes straight from corporate treasury coffers." The idea is also spreading, the article reports, as other investment firms consider proposing a ban.

The Supreme Court may soon have the opportunity to revisit some aspects of Citizens United if it decides to take up the case related to Montana's corporate political spending law. A coalition of investors managing more than $100 billion has filed an amicus brief supporting Montana's corporate political spending ban, arguing primarily that a major public corporation's political contribution violates shareholders' First Amendment rights, since shareholders, in effect, underwrite the corporation's political speech but have not knowingly consented to that speech and have no meaningfully vehicle through which to object. The article notes that "in the absence of a change of heart from the Supreme Court and an overarching rule change from the SEC, institutional investors say they plan to continue chipping away at the issue by filing shareholder resolutions, one company at a time." They have some success so far: according to the Center for Political Accountability, 100 companies, including half of the S&P 100, have agreed to adopt transparency policies on political contributions since the Center began its efforts in 2003 to persuade companies to improve political spending disclosure.

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