A new bill that has been introduced in the House, H.R. 1053, would direct the SEC to issue regs to require public companies to disclose political expenditures in their annual reports and on their websites. While the bill’s chances for passage in the House are reasonably good, that is not the case in the Senate. In the absence of legislation, 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, perhaps in large part because of the absence of support from large institutional investors. But that notable absence has recently come in for criticism from an influential jurist, Delaware Chief Justice Leo Strine. Will it make a difference?

The history of efforts to mandate political spending disclosure through rulemaking is one of profound frustration to the proponents. Rulemaking petitions were filed with SEC in 2011 and 2014 to no avail, notwithstanding over a million signatures in support in one case. Some in Congress were so concerned that the SEC would take action on the petitions that specific prohibitions were included as part of Omnibus Spending Bills. But as discussed in this PubCo post, former SEC Chair Mary Jo White was firmly against any such undertaking, contending that the SEC should not get involved in politics, and her successor has not really addressed the issue.

According to this report from Equilar, there were at least twice as many social and environmental proposals as any other shareholder proposal type for four of the last five fiscal years, with over half being social proposals. Equilar reports that the largest percentage of social proposals concerned the

“dispensation of discretionary funds used in lobbying activities, political contributions and charitable donations. These propositions often include an element of disclosure as to how those funds are allocated, along with disclosure of associations with trade organizations. A majority of these political and lobbying-based shareholder proposals have to do with political donation transparency. In 2010, the Supreme Court of the United States held many of the restrictions unconstitutional in Citizens United v FEC. As a result, previous regulations, requiring full disclosure and strict discretionary spending limits, have been largely overturned and have resulted in less transparency in this instance. Prior restrictions required that corporations establish Political Action Committees—PACs—with segregated funds. Such funds were limited to donations by employees or shareholders, and required details about donors and the amounts donated to be fully disclosed to shareholders and the FEC. Under the current regulatory framework, corporations still cannot donate directly to politicians, but there remain many financial avenues to pursue their interests. Since the framework has changed, it is a logical progression that shareholders have concerns regarding how such funds are allocated and seek disclosure thereof.”

While some of the environmental proposals have recently gained purchase with majority votes in favor (see this PubCo post), the same cannot be said for political spending proposals.

Why is that? While those environmental proposals were approved thanks in large part to favorable votes from some of the largest institutional shareholders, institutional investors have, for the most part, shied away from political spending proposals. In some ways, that seems to be a bit paradoxical in light of the Big 4’s expressed concern with sustainability, given that corporate political spending could well be devoted to purposes inconsistent with that goal. For example, in its 2019 voting guidelines, asset manager BlackRock made clear that the bar for support of political spending proposals was relatively high, taking the position that, when

“presented with shareholder proposals requesting increased disclosure on corporate political activities, we may consider the political activities of that company and its peers, the existing level of disclosure, and our view regarding the associated risks. We generally believe that it is the duty of boards and management to determine the appropriate level of disclosure of all types of corporate activity, and we are generally not supportive of proposals that are overly prescriptive in nature. We may decide to support a shareholder proposal requesting additional reporting of corporate political activities where there seems to be either a significant potential threat or actual harm to shareholders’ interests, and where we believe the company has not already provided shareholders with sufficient information to assess the company’s management of the risk.”

This reluctance of institutional shareholders to step up with regard to political spending proposals has come under fire from none other than Delaware Chief Justice Leo Strine. The title of this 2018 paper, “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” institutional investors, BlackRock, Vanguard, State Street and Fidelity, 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.)

According to Strine, corporate political spending has a “double legitimacy” problem. That’s because the Big 4 don’t have legitimacy to speak for workers politically, and “public company management has no legitimacy to use corporate funds for political expression either.” So 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.”

The need to monitor and rein in corporate political spending is not an entirely new position for Strine. In a 2014 paper, 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.”

SideBar

The cause of Worker Investors seems to be a consistent refrain for Strine. As reported in the Daily Journal, in a recent speech at the 46th Annual Securities Regulation Institute in Coronado, California, Strine posited the theory that the “social and political climate under which corporations see increased public scrutiny and pressure is a product of workers not feeling they have a say equal to their skin in the game….’More and more of the gains have gone to the folks at the top, but the irony is more and more of the investment is coming from working people.’” As reported, according to Strine, “a ‘systemic decline in the voice and leverage of working people’ drives economic anxiety, causing heavy regulation” in various locations. The influx of corporate money into the political process exacerbates the problem by allowing “business to stymie broadly popular legislation.” Here too he reportedly advocated a supermajority vote to approve spending investor funds on political issues.

According to the article, he also made reference to the Accountable Capitalism Act, introduced by Senator Elizabeth Warren, as an example of “legislative backlash.” That bill would require certain large corporations to obtain a federal charter, which would, in effect, put an end to the notion that the purpose of the corporation is solely to maximize shareholder value. Under the bill, the applicable standard of conduct—which Warren wrote was patterned after the state “benefit corporation” model—would require directors to manage the business and affairs of the corporation in a manner that seeks to create a general public benefit and balances the pecuniary interests of the shareholders with the best interests of persons that are materially affected by the conduct of the corporation, including employees, customers, communities, the environment, and the short- and long-term interests of the corporation (including the possibility that those interests may be best served by the continued independence of the corporation). One provision of the bill would require that 40% of the board be elected by the corporation’s employees. (See this PubCo post.) According to the article, Strine thought the bill would “essentially turn large American corporations into Delaware Benefit Corporations by default” (see this PubCo post) and viewed some aspects of the bill as “underdeveloped,” but thought it was “a candid attempt to put forth a solution.”

SoapBox 

Warren’s proposal to federalize corporations to allow the boards of a significant proportion of public companies to consider other constituencies might be largely superfluous if Delaware made some changes, since most companies are incorporated in Delaware. As discussed in this PubCo post, Strine is a big fan of the Delaware Public Benefit Corporation. Unfortunately, there has not exactly been a mad dash by public companies toward adoption of that form and few public benefit corporations have taken the IPO plunge. (See this PubCo post.) Yet Strine has made clear his view (for example, here, here and here) that the concept that corporate directors are entitled to take into consideration the interests of constituencies other than shareholders is misguided and ineffective (largely because, he believes, the concept does little to change the accountability structure or the incentives of directors to take the interests of these other constituencies into consideration). Ok, maybe it needs more time to gestate, but perhaps the Delaware courts should consider the possibility of sidling up to some version of stakeholder theory? If the public benefit corporation concept does not ultimately gain acceptance by public companies—or catches on only for certain niche companies, such as those in education, currently the business of one (and only?) publicly traded PBC—maybe the Delaware courts might consider broadening their perspective and revisiting the concept of “maximizing shareholder value” as the only purpose of corporations under Delaware law? After all, how likely is it that Citizens United will be overturned any time soon?