The January 6 attack on the Capitol and the subsequent efforts to rewrite voting and vote-counting laws led many companies and CEOs to speak out, sign public statements and pause or discontinue some or all of their political donations.  However, as companies and executives increasingly take positions and express views on important social issues such as voting and democracy, climate change and racial injustice, there are many who want to hold them to it. As an MIT Sloan lecturer suggested in this article in the NYT, a signed statement from a CEO expressing commitment to an issue "gives people who want to hold corporations accountable an I.O.U." One way the public has tried to call companies to account is to examine any dissonance or contradiction between those public statements and the company's political contributions—to the extent those contributions are publicly available.  A piece published recently in the NYT's DealBook, On Voting Rights, It Can Cost Companies to Take Both Sides, explores how that concept has played out dramatically this year, particularly as investors have sought accountability by submitting more shareholder proposals than ever seeking political spending and lobbying disclosure—and actually winning. As the executive director of the Black Economic Alliance contended in the article, "[b]eyond C.E.O. statements[,] businesses demonstrate their values by how they allocate their resources." And investors are increasingly compelling companies to disclose their allocation of resources on political spending.

According to the NYT, in 2019, of 51 political spending proposals at S&P 500 companies, none passed, and the average level of support was only 28%.  By comparison, in 2020, of 55 political spending proposals, six passed and average support increased to about 35%.

The Center for Political Accountability, together with its shareholder-proposal partners, has so far this year submitted 30 proposals. Of the 12 that went to a vote, six received majority votes, including two at 80% and one at 68%. CPA and its partners have also withdrawn 13 proposals; 10 were agreements with companies regarding disclosure and three were strategic withdrawals where the company made substantial improvements but not enough to merit an agreement. According to CPA, "this has been the strongest proxy season" they've had. Their average vote has steadily increased in the past three years from 36.4% in 2019 to 41.9% last year and 48.1% for 2021.

The NYT  also reports that, since 2010, New York State's public pension fund, one of CPA's proposal partners, has submitted over 150 shareholder proposals on political spending. This year, two proposals received a majority vote and agreements were reached on three of five proposals, "a much higher success rate than in previous years."  According to the pension fund's trustee, the New York State comptroller, "[c]orporate spending on political causes in the dark is bad for business....It puts companies, and their value, at risk."

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Of course, these proposals are precatory only, but boards typically consider high levels of votes in favor as a reason to respond to the issue, engage with shareholders or more. Failure by the board to take some action on shareholder proposals that received the support of a majority of the shares cast is considered a "responsiveness" issue by ISS in determining whether to recommend votes in favor of board members. Similarly, while Glass Lewis "may note instances of significant support for shareholder proposals," it believes that "clear action is warranted when such proposals receive support from a majority of votes cast (excluding abstentions and broker non-votes)."

Political spending disclosure is tied to ESG, the NYT  observes, invoking SEC Commissioner Allison Lee, who views the disclosure as a way that investors can "test companies' claims about support for climate-friendly policies or social justice issues and...hold corporate managers accountable before any associated risks materialize." Even though there is no SEC rule that explicitly mandates political spending disclosure, Lee suggests that "companies may still have an obligation under the anti-fraud rules to ensure the statements they choose to make are not materially misleading."

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In remarks to the Center for American Progress, entitled A Climate for Change: Meeting Investor Demand for Climate and ESG Information at the SEC, Lee stressed the importance of political spending disclosure in connection with ESG, noting in particular that investors need to be able to ascertain inconsistencies between a company's public statements and its corporate political donations. Political spending disclosure, she said, "is inextricably linked to ESG issues." She cited research showing that many companies that made carbon-neutral pledges or statements in support of climate initiatives have donated to candidates with "climate voting records inconsistent with such assertions."  In this context, disclosure is key to accountability.  (See this PubCo post.)

And, in keynote remarks at the 2021 ESG Disclosure Priorities Event, Lee contended that political spending is an issue that can be extremely important to reasonable investors, particularly because shareholders want to be able to assess the use by companies of shareholder funds for political influence. But, despite rulemaking petitions and other efforts, there are no SEC requirements to disclose political spending and, as a result, it's rarely disclosed in SEC reports. (As she notes, the SEC is currently prohibited by Congress from spending funds to finalize a rule on this subject.) Arguably, she continued, companies' public statements after the events of January 6 regarding their political spending could "give rise to a duty to disclose their actual political contributions—not unlike the duty to disclose merger negotiations in Basic [v. Levinson]—to ensure that such statements are not misleading, especially if actual contributions run contrary to these pledges. (See this PubCo post.)

Former SEC Commissioner Robert Jackson told the NYT that, "until recently company leaders often didn't know where their political giving went. With more pressure to be transparent, they're less likely to delegate that task. 'More and more well-run companies and responsible boards of directors are demanding to know where money goes in politics,' he said."

The NYT predicts that voting rights might be the issue that throws into sharpest relief any contradiction between corporate political statements and corporate political spending. As efforts have been made in a number of states this year to restrict ballot access and change who has final say on the vote count, the NYT reports, "hundreds of companies have signed statements opposing 'any' voting restrictions.... Voting is the basic right underlying democracy and a healthy business environment, the companies say." But many have also made substantial donations to state party groups "that helped elect the politicians now proposing and advancing laws that restrict voting rights." If a conflict between action in the form of political spending and publicly announced core values is brought to light, the conflict could fracture the company's relationship with its investors, employees, customers and the public, who might view the company's public statements as merely virtue-signaling or even hypocritical—perhaps leading them to spurn the company and its stock. The CPA "traced tens of millions of dollars of donations from public companies in the past two election cycles" to state party leadership committees and governors associations, "key groups that work to elect candidates at the state level, where much of the action on voting rights is now taking place." These committees and associations are "527" groups, which "can accept unlimited donations from corporations—direct from their treasuries, not corporate political action committees—and distribute the funds to candidates, including those who may oppose companies' public policy stances."  

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A report from the Center for Political Accountability, Conflicted Consequences, looked at corporate political spending through non-profit, tax-exempt "527" organizations, such as state party leadership and legislative campaign committees and the governors and attorneys general associations. These organizations accept "contributions from a variety of sources and then spend it to advance a broad political agenda." Once a company has contributed to a 527 group, the corporate and other funds are pooled and then channeled to state and local PACs and candidates, to "dark money" groups and to other national 527 groups. As a result, companies no longer control the use of their funds. The groups determine how the money is used, what the message will be and which candidates or issues to support, regardless of the contributor's own goals and intentions.

The CPA found that, over the last 10 years, hundreds of millions of dollars have been poured into six large partisan groups by publicly held companies and their trade associations, destined to help elect state officials who drove "new agendas that have transformed state and national policy." What's more, a number of the intermediate organizations that are financed through 527s "often direct that money in ways that belie companies' stated commitments to environmental sustainability, racial justice, and the dignity and safety of workers." The report also highlighted companies that voiced their concern for racial injustice and support of diversity, but, through their donations, ended up supporting legislators who were instrumental in implementing racial gerrymandering. These and other conflicts were exposed in various media reports.  As a result, the CPA advised, companies and their boards need to be aware of an "increasing risk...from their political spending. When corporations take a public stand on such issues as racial injustice or climate change, the money trail... can lead to their boardroom door. It can reflect a conflict with a company's core values and positions" and lead to sometimes humiliating, and perhaps even toxic, unintended consequences. (See this PubCo post.)

Many companies interviewed by the NYT for the article refused to respond on the record about their future donations. To the extent these donations continue, or resume after a post-January 6 pause, will public scrutiny lead to charges that these companies strayed from their announced core values, with all the negative consequences that may follow from that?

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What about political spending legislation? That could obviate the need for all of these shareholder proposals. In the aftermath of January 6, Senators Chris Van Hollen and Robert Menendez reintroduced the Shareholder Protection Act of 2021 to mandate not only political spending disclosure, but also shareholder votes to authorize corporate political spending. Among other things, the bill would amend the Exchange Act to add, in new Section 14C, a requirement that proxy statements contain a description of any expenditure for political activities (as defined) proposed to be made in the coming fiscal year that has not been authorized by a vote of the shareholders, including the proposed total amount, and provide for a separate vote of the shareholders to authorize these expenditures. Companies would be prohibited from making any political expenditures that have not been authorized by a vote of the holders of the majority of the outstanding shares. (See this PubCo post.)

The accompanying press release observed that "more than 1.2 million securities experts, institutional and individual investors, and members of the public have pressed the [SEC] for a political spending disclosure rule. Yet, no political spending disclosure standards have actually been established, which has allowed corporate executives to continue spending shareholder money without disclosure to and approval from the very investors funding those contributions." That's a reference to the 2011 rulemaking petition filed with the SEC by a committee of law professors (including future SEC Commissioner Robert Jackson) requesting that the SEC propose rules to require disclosure of the use of corporate resources for political activities. The petition ultimately received over 1.2 million letters in support, and, in May 2015, former SEC Chairs and Commissioner, William Donaldson, Arthur Levitt and Bevis Longstreth, sent a letter to then-SEC Chair Mary Jo White urging her to take action on the petition. (See this PubCo post.) Also in 2015, 44 Democratic Senators sent a letter to White to add their voices "to the many who have expressed frustration and disappointment that the SEC decided to remove this issue from its regulatory agenda entirely." In their view, because shareholders are the "true owners" of corporations, public companies should be required to disclose to their owners how their money is being spent. (See this PubCo post.)

As you probably know, Chair White took a firm "hands off" position, emphasizing that the SEC should not get involved in politics, according to Bloomberg. (See this PubCo post.) Not to mention that numerous appropriations bills have precluded adoption of any rules by the SEC requiring disclosure of corporate political spending. (See, e.g., this PubCo post, this PubCo post and this PubCo post.) In fact, Section 631 of the most recent appropriations act, the ''Consolidated Appropriations Act, 2021,'' prohibits the SEC from using any of the funds made available "to finalize, issue, or implement any rule, regulation, or order regarding the disclosure of political contributions, contributions to tax exempt organizations, or dues paid to trade associations."  Accordingly, some action by Congress would be necessary to enable the SEC to adopt political spending disclosure requirements.

Notably, in questioning by the Senate Committee on Banking, Housing and Urban Affairs in connection with his nomination as SEC Chair, Gary Gensler, was asked by both sides about political spending disclosure. Gensler replied that his position on the issue would be grounded in economic analysis and the courts' views of materiality as the information reasonable investors want to see as part of the total mix of information. Gensler added that he considered the 80 shareholder proposals submitted last year on the topic and the 40% vote in favor as a strong indicator.  In light of that level of investor interest, political spending disclosure was something he thought the SEC should consider. Of course, if this bill is ultimately signed into law, political spending disclosure—and more—will certainly be on the SEC's plate.

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