Last week, the SEC ruled that companies must allow shareholder proposals that seek an annual review and vote on corporate political expenditures. NorthStar Asset Management filed a shareholder proposal at Home Depot (HD) asking the company to disclose its political spending policies and anticipated spending for the next year. Shareholders would also get to cast a non-binding vote on whether they supported these policies and spending plans.
NorthStar's proposal isn't binding, either -- but Home Depot still challenged it at the SEC so it wouldn't have to allow its shareholders to vote on it. The SEC staff ruled against the company and now shareholders of Home Depot will receive a proxy card or email notice giving them a chance to vote on NorthStar's proposal at the company's annual meeting on June 2. The SEC's ruling opens the door to proposals along these lines at many more companies next year.
Sanford Lewis, who represented NorthStar in defending the proposal, writes,
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.The Supreme Court's Jan. 2010 decision in Citizens United overturned decades of rulings to give corporations First Amendment rights to pay for political advertising. Direct contributions to political campaigns are still limited, but executives can direct corporate dollars to pay for unlimited ads and other means (the particulars of the case concerned an anti-Hillary Clinton movie from a non-profit group circulated during her presidential campaign).
The procedures of corporate democracy
In a key sentence from the majority decision written by Justice Kennedy, the court predicated the First Amendment right of corporate free speech on the ability of shareholders to ensure that the speech reflects their views rather than diverting corporate assets for the benefit of the executives. Justice Kennedy wrote that abuse can be corrected by shareholders "through the procedures of corporate democracy." That is exactly what NorthStar's proposal is intended to do.
At this week's annual meeting of the Council of Institutional Investors, the issue of shareholder oversight on corporate political spending came up several times. CII members invest more than $3 trillion of pension funds. They describe themselves themselves as "patient capital" because of their 30-year investment horizons and near-permanent investment in the market as a whole through indexing and diversified asset allocation through every sector.
Abuse of the political process
As a permanent financial infrastructure, they are vitally concerned about the way some corporate executives abuse the political process, as documented by Huffington Post columnist Robert Elisberg on the hidden sources of funds behind an attack on a local candidate. They are also concerned about the consequences when poor choices are made public, as when Target's contribution to an anti-gay-rights politician led to protests and boycotts.
The latter case was especially embarrassing because it was contrary to Target's public statements about gay-friendly policies for its own employees. Target explained that it was the candidate's positions on jobs and the economy it was endorsing, but it learned the hard way that whatever it might gain on those issues it would lose by associating with the rest of his platform.
When presented with the problem of forcing dissenting shareholders to fund speech that does not represent their views, Kennedy wrote, "the remedy is not to restrict speech but to consider and explore other regulatory mechanisms." The SEC's ruling on the NorthStar proposal is the first of these regulatory responses to bring more transparency and accountability to corporate political spending.
Companies that want to avoid more new rules should begin to reach out to their shareholders to explain their procedures and criteria for political campaign and lobbying contributions and be able to show how they support both the brand and long-term shareholder returns.