Regulatory: Limiting corporate political activity

Shareholder proposals, SEC rules and disclosure requirements

In the wake of Citizens United and other deregulatory court cases, corporations and unions are now permitted to spend their own funds on “express advocacy” or “electioneering communications.” Since Citizens United was decided, critics of the decision have tried to restrict how corporations may be involved in the political process in several ways, many of which are outside of the usual campaign finance framework.

  1. They have tried to impose additional disclosure obligations on donors and recipients through legislation and regulation.
  2. Advocacy groups have tried to compel corporations to adopt policies to limit their political activity and to disclose political spending.
  3. Shareholders have launched similar efforts through the proxy process.

Congressional Efforts

Disclosure: A few months after the Citizens United decision, legislation was introduced to impose additional disclosure requirements on entities making independent expenditures. That bill would have required organizations to disclose the identity of large donors and to identify such donors in any political ads they fund. It also would have restricted election spending by government contractors and corporations with foreign ownership. The bill passed the House, but failed in the Senate.

A new version was introduced in January, mirroring the original bill in many ways, but without the spending limits on contractors and foreign corporations. The new bill would require:

  • Enhanced public reporting by all groups, including Super PACs
  • Political advertisements to disclose the top funders during the actual broadcast and include a statement from the head of the group endorsing the message
  • Lobbyists to disclose campaign-related expenditures on their Lobbyist Disclosure Act reports
  • Unions and corporations to disclose political spending to their members or shareholders.

It is unlikely that the bill will pass in the current Congress.

States have begun to followsuit. In Iowa, the legislature passed a law requiring corporate leadership to approve political expenditures before they are made. California considered legislation that would have required political advertisements to identify the three largest funders of the ads by name.

Corporate Governance: Another piece of pending legislation would require:

  • Public companies to include a description of their political activities planned for the fiscal year in their proxy statements
  • An affirmative vote of a majority of the shareholders to approve the political spending
  • The SEC to issue rules requiring a board vote on any political expenditures of $50,000 or any expenditure resulting in the total amount spent by the company for a particular election to exceed $50,000
  • Regular reporting of political activity by publicly traded companies.

It is unlikely that this bill will pass during this Congress.

Regulatory Efforts

In August 2011, a group of academics filed a petition for rulemaking asking the SEC to require disclosure of corporate political activities. Specifically, the petition asks the SEC to create rules that would:

  • Provide for a very low de minimus level of spending that does not have to be disclosed
  • Establish an appropriate frequency for disclosure (with the suggestion that it be tied to current proxy disclosure cycles)
  • Determine which payments would have to be disclosed, with an emphasis on determining when payments to intermediaries, such as trade associations and other nonprofits would have to be disclosed.

In the petition, the authors point to growing shareholder efforts to impose disclosure obligations on companies as a basis for the SEC to do so by rule. In other words, they have attempted to create a feedback loop: those who want disclosure file shareholder initiatives and, regardless of the outcome of those initiatives, supporters of such efforts then ask the SEC to impose the same obligations by rule.

The SEC has already created a “pay-to-play” rule to prevent certain investment advisors from making contributions to candidates, so this is not entirely unchartered territory for the SEC.

Third Party Efforts

Advocacy Organizations: In addition to legislative and regulatory efforts, advocacy groups, led by the Center for Political Accountability (CPA), have pursued campaigns to encourage corporations to increase disclosure and oversight of their political spending. In the fall of 2011, the CPA released a report ranking 99 companies based on their political disclosure and accountability.

Shareholder Efforts: The 2011 proxy season saw a significant uptick in the number of political spending proposals introduced by shareholders. The Manhattan Institute’s Center for Legal Policy’s Proxy Monitor project identified 36 political spending proposals in 2011 (up from just 14 in 2008). Proxy Monitor found that the majority of these proposals—none of which were adopted—were supported by labor-affiliated and social-investing funds.

The number of such proposals is expected to rise in the upcoming proxy season. According to a report by Ernst & Young, released in February, the 2012 proxy season may see a record number of shareholder proposals focused on corporate political spending and lobbying activities.

The report further notes that some new proposals have gone beyond the traditional call for board oversight and disclosure to include resolutions to outright ban corporate political spending. For instance, on Jan. 17 , Trillium Asset Management and Green Century Capital Management announced that they had filed shareholder resolutions with several companies urging them to refrain from political contributions. These efforts follow a letter-writing campaign by US PIRG and Common Cause seeking to have all 500 companies in the Standard & Poor 500 “sign a public pledge renouncing the use of funds from their corporate treasuries for political purposes.” They also asked the companies to specify that their trade association dues should not be used for political purposes.

There also has been a new push for companies to disclose information about their lobbying activity. Lead by activist investor Walden Asset Management, several corporations have received shareholder resolutions seeking additional lobbying disclosure. At least three companies—Coca-Cola Co., General Electric Co. and Johnson & Johnson—have agreed to publicize lobbying information.

Although legislative efforts stand little chance of success in the current Congress, advocacy groups will likely make increased demands on corporations to disclose or even limit their political activity.

Contributing Author

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Ronald Jacobs

Ronald M. Jacobs is a Washington-based partner in Venable’s regulatory group. He co-chairs the political law practice at Venable LLP, and counsels clients on all...

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Contributing Author

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Alexandra Megaris

Alexandra Megaris is an associate in Venable’s regulatory practice group. She assists clients with ongoing compliance with all aspects of state and federal political law,...

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