Companies say this is an effort to micromanage execs and curtail corporate political activity.
Activist shareholders are aggressively pushing to get broad new lobbying disclosure initiatives on proxy ballots this year, in an effort to convince a number of corporations to voluntarily disclose campaign contributions to investors.
In January, a coalition that includes the New York State Common Retirement Fund, Walden Asset Management and the AFSCME Employees Pension Plan filed shareholder resolutions with 40 corporations calling on them to publicly disclose the total amount of money they have spent on lobbying and ‘grassroots lobbying communications’ at the local, state and federal levels. In addition to standard lobbying expenses, the resolutions explicitly ask for information on payments to third-party groups that seek to influence legislation, including membership fees and payments to tax-exempt organizations that ‘write and endorse model legislation’, and expenditures used for direct lobbying and ‘grassroots lobbying communications’ by trade associations.
The initiatives also call for board oversight of lobbying expenditures, urging management to present a comprehensive report to the audit committee of the board in addition to posting it on the company website.
‘Shareholders have the right and need to understand how company resources are spent in efforts to change both elections and public policy,’ read a statement released in January to announce the new resolutions on behalf of 40 investors. ‘The investors believe that enhanced lobbying disclosure will enable them to better evaluate business risk associated with their companies’ efforts to influence regulatory and legislative processes.’
Only natural
Advocates of the new proposals are billing them as ‘a natural extension’ of shareholder campaigns calling for greater political spending transparency, which have led nearly 100 companies over the last seven years to voluntarily increase information available on company websites relating to campaign contributions.
But many corporate secretaries and governance experts say the demands for lobbying disclosure raise a whole host of new concerns that are likely to fuel resistance to the campaign. The arguments range from worries that releasing lobbying information might give competitors an unwarranted peek at confidential business strategies and priorities, to complaints that the new proposals represent an attempt by shareholders to ‘micromanage’ the actions of company leaders. Some contend they may even be a bold effort to chill corporate political activity.
Caleb Burns, a partner at Wiley Rein & Fielding, notes that it’s still too early to say how management and shareholders will respond to the new raft of proposals when annual meetings roll around. But, he adds, ‘The reasons why they might oppose the proposals are pretty obvious – it’s a significant intrusion into the authority of management because you are talking about decisions that are closely tied to business operations.’ Perhaps even more so than campaign contributions, Burns says, corporate lobbying expenditures are ‘fundamental business decisions, intimately related to business strategies’.
Stephen Bainbridge, a UCLA law professor and expert on corporate governance, agrees. He offers the example of a mining company: if that company were forced to report that it was lobbying state legislators for mineral rights on a particular property, it might allow competitors to infer that ‘you found gold there’.
Too much oversight?
An even larger issue of contention may be that the new provisions call for board oversight of lobbying decisions, which will restrict CEOs and their management teams.
‘This goes back to fundamental concepts of corporate law: to what extent is management permitted to manage the affairs of the company?’ says Burns. ‘The fewer constraints you put on management to do that, the freer they are to operate more effectively.’ By requiring board scrutiny of lobbying decisions, the resolutions could ‘very well hamstring the ability of management to effectively and efficiently run the company for the benefit of its shareholders’.
Tim Smith, senior vice president and the director of ESG shareowner engagement at Walden Asset Management and one of the most vocal advocates of the resolutions, says such oversight just makes sense. Companies, he notes, spend ten times more money lobbying than on campaign contributions, and that lobbying money, if spent in ill-advised ways, could constitute a business risk.
‘Imagine, for instance, if a financial institution with a good image with consumers ends up lobbying hard against a consumer protection bureau,’ Smith says. ‘That could be something that causes controversy, and thus risk.’
By the end of February, at least nine of the 40 companies targeted by the coalition had filed challenges with the SEC’s Division of Corporation Finance announcing their intention to omit the resolutions from their proxy ballots. Even so, Smith says a number of companies have been responsive to the proposals, resulting in the voluntary withdrawal of some shareholder resolutions. According to AFSCME, three proposals have been dismissed by the SEC for being duplicative of previously filed political contribution proposals, and companies have chosen to settle proposals in nine other cases.
Making progress
Among the companies that have made headway in discussions with the activist investors are Pfizer and Johnson & Johnson (J&J). Matthew Lepore, vice president and corporate secretary of Pfizer, confirms that shareholders have agreed to withdraw their Pfizer resolution, but wants to keep discussions with specific shareholders confidential. Pfizer already includes links on its corporate governance website to lobbying reports filed at the state level.
‘There are some issues around confidentiality, to the extent that it can cross into your business strategy,’ Lepore, pictured left, explains. ‘I think everybody is trying to be thoughtful about it and trying to figure out what things they should do and what they need to get shareholders to think about. We have all kinds of policies around disclosure of lobbying based on various state and federal requirements. Now we are looking at how interested shareholders want it presented and what makes sense.’
Doug Chia, assistant general counsel and corporate secretary at J&J, says his company recently wrapped up talks with Walden Asset Management about how to proceed. While J&J agreed to accommodate many of Walden’s requests, Walden was also willing to listen to the pharma giant’s concerns, Chia says.
‘We think Walden makes a number of good points, so we are going to revamp the website to address concerns about corporate lobbying, how decisions get made and what kind of oversight process there is,’ Chia continues. J&J says it is also willing to add a description that provides a ‘basic explanation of how the company lobbies for its interests’, and to begin pulling together publicly available lobbying disclosure reports.
‘These are easy things we can do given the technology that exists,’ Chia, picture right, says. ‘It’s very similar to the initial steps we
took with political contributions when investors first approached us about more transparency a number of years ago.’
Chia stresses, however, that a balanced approach will need to be taken to make the process work. He notes that sometimes companies lobby legislators in anticipation of moving in a new business direction and that ‘it might not be in a company’s best interest to telegraph every area it is planning on being in in the future. Companies do want to have some kind of privacy around their future business prospects.’
Still some hold-outs
Of course, not everyone is as willing to engage in discussions as J&J. Among the first to file a notice with the SEC announcing its intent to omit the resolutions from its proxy statements was AT&T, which argued that the proposal was invalid because it violated Rule 14a-8 by ‘substantially duplicating’ another proposal previously submitted to AT&T that will be included in the company’s proxy materials. That proposal refers broadly to disclosure of the company’s ‘political activities’, but does not explicitly single out lobbying for disclosure. On February 3, an SEC special counsel informed AT&T that the regulator was not convinced, stating, ‘we do not believe that AT&T may omit the proposals.’
More such SEC rejections may soon follow. Prior to filing the resolutions, proponents of the lobbying disclosures led by AFSCME worked hard to vet the language with the SEC, which had rejected several earlier versions of the proposals because their definition of ‘grassroots lobbying’ was deemed too imprecise. Eventually the SEC approved language that defined ‘direct lobbying and grassroots lobbying’ as a local, state or national communication ‘directed to the general public that (a) refers to specific legislation, (b) reflects a view on the legislation and (c) encourages the recipient of the communication to take action with respect to the legislation.’
AT&T officials have offered a statement explaining their opposition to disclosure of any politically related spending. ‘In recent years, shareholder proposals similar to this have been defeated by 2–1 margins, and have never gotten more than 32 percent of the vote. This suggests that shareholders are satisfied with our company’s current policies and compliance,’ the statement reads. ‘We believe that any proposals to go beyond existing law should apply to all participants in the political process, including unions and advocacy groups, not just to one company.’
This argument is emerging as an aggressive defense against the new proposals from critics who contend they are little more than an attempt to intimidate corporations bent on lobbying against the interests of unions and their allies on the left.
‘This is nothing more than an attempt by unions to try to get a leg up and hamstring their competitors when corporations try to advocate positions against their interests on the Hill,’ says J. W. Verrett, a professor at George Mason University who has testified before Congress several times on financial regulatory reform. ‘Both unions and industry have the right to go to Congress and advocate, but the primary reason unions are pushing this is to silence the voice of American corporations.
Corporations are very risk-averse, and unions are going to try to use this in a broader push to try to harm customer relations.’ Verrett’s concerns are shared by Bainbridge, though Bainbridge adds that there is ‘an incentive for corporations to be spineless on this issue.
‘There are multiple areas where they are engaged with activist shareholders on a wide variety of issues that strike more closely to home – particularly for management – and here I am talking specifically about say on pay,’ Bainbridge continues. ‘If management’s thinking is that it’s best to pick your battles, this may be a battle they think is less worth fighting.’
