Harvard Law: SEC Proposed Proxy Rules Changes—A Risk to Companies, Corporate Political Disclosure
Updated: Jan 13
This post first appeared on Harvard Law School's Forum on Corporate Governance.
Bruce F. Freed is President and Dan Carroll is Vice President for Programs at the Center for Political Accountability; and Karl J. Sandstrom is senior counsel at Perkins Coie LLP and counsel at CPA. This post is based on their CPA memorandum.
Almost a decade since Citizens United, however, the U.S. Securities and Exchange Commission (SEC) is pressing forward with proposed rules changes that would diminish a pillar of corporate democracy and also imperil a successful shareholder campaign for corporate political disclosure and accountability.
The SEC proposals are supported by large U.S. business groups including the U.S. Chamber of Commerce, the National Association of Manufacturers and the Business Roundtable. These groups and regulators would disenfranchise shareholders who have deployed the proxy process to hold companies accountable on contentious issues such as gun control, diversity, pay, and climate change.
Another issue advanced by shareholders, despite stalwart opposition from politically active trade associations, is the disclosure of company political spending. A shareholder campaign we have led for disclosure of corporate spending on elections has convinced companies that cloaking their political spending is bad for business and for the country. It’s fair to ask if some of the support for the SEC proposed rules is a knowing effort to keep shareholders in the dark about the political uses to which their money is devoted.
The SEC proposal would set high hurdles for investors wanting to exercise their voice. Commissioners voted 3-2 to propose drastically increasing ownership thresholds for shareholders submitting motions to be included in a company proxy statement, from the current $2,000 in stock in a target company owned for at least one year to $25,000, or $15,000 if owned for at least two years. Moreover, the proposed rule would make it far more difficult to resubmit shareholder proposals if they fail the first time.
These rule changes would disproportionately impact engaged investors who have successfully used shareholder proposals to get a vote on specific questions during the annual proxy process. Such proposals have given shareholders leverage to compel companies to recognize the social, environmental and governance risks that their actions may pose.
The SEC’s existing shareholder proposal process has paid off for corporations. It serves as an early warning system for management and as a pressure relief valve. It provides companies an opportunity to meaningfully respond to public concerns on issues that transcend the daily operating demands on companies but are finding expression in our national political debate.
In our own experience, the campaign to lift the veil on corporate dark money has advanced based not only on reasoned arguments about sunlight in a democracy and avoiding corporate risk but also on proxy resolutions from our shareholder partners. Along the way, a critical mass of companies embracing sunlight and policies governing and overseeing their spending has come to disagree with trade groups to which they belong.
Because it takes time to marshal persuasion and understanding from companies, the multiyear proxy process has proven invaluable to our effort. More than half of the companies in the S&P 500 have improved their transparency in their political spending, and this year, 73 S&P 500 companies—the greatest number ever—received the top rating for transparency and accountability in a nonpartisan scorecard. That’s up from 28 when the benchmarking of the S&P 500 started five years ago.
Proxy advisors have played a critical role. They’ve given in-depth, reasoned analysis of shareholder resolutions, at costs that would otherwise have to be borne by investor groups. They’ve allowed a broad range of investors to take advantage of their analyses. But a separate SEC proposal would set new requirements for proxy advisors and hamstring their role.
Justice Anthony Kennedy’s majority opinion in Citizens United underscored protections afforded shareholders “through the procedures of corporate democracy.” At the same time, he wrote that disclosure “permits citizens and shareholders to react to the speech of corporate entities in a proper way. This transparency enables the electorate to make informed decisions and give proper weight to different speakers and messages.”
With the tenth anniversary of Citizens United approaching in January, we fear that the SEC is poised to undermine both principles. It would threaten a foundation of corporate democracy that has existed since 1942. It would create a roadblock for meaningful dialogue between companies and those whose interests they are intended to advance. Our experience is that the existing rules—at little cost and great benefit to companies—have made corporate political transparency and accountability a norm. Changing the rules now would deprive shareholders and companies of future opportunities for dialogue on issues like political transparency and accountability, where such dialogue might have never occurred without the existing rules in place.