Investors and shareholder activists have become increasingly focused on the oversight and disclosure of political expenditures by public companies since the Supreme Court’s 2010 decision in Citizens United v. Federal Election Commission, which invalidated restrictions on certain corporate political spending. Because the 2012 presidential election is expected to be a hotly contested race funded by record levels of political spending, the public’s interest in political and lobbying expenditures by public companies is intensifying and merits a careful review of recent trends in the policies and disclosure practices of public companies with respect to their political spending.
Since 2003, the Center for Political Accountability (CPA) has coordinated a campaign to cause companies to disclose political expenditures and to require board oversight of their political spending with corporate funds. According to a report posted by the National Association of Corporate Directors, the number of shareholder proposals addressing political contributions rose from 56 to 88 in the year following the Citizens United decision, with 55 ultimately coming to votes in 2011. Support for the 35 CPA-style resolutions that came to votes at meetings increased from 28.4% in 2010 to 32.8% in 2011.
A November 2011 study by the Sustainable Investments Institute (Si2), funded by the IRRC Institute, calculated that S&P 500 companies spent $1.1 billion on direct political expenditures in 2010, with 87% of that amount spent on lobbying, as distinguished from contributions to candidates, to parties, to federally registered political committees and for ballot initiatives. Si2 found that disclosure of political spending is increasing and saw a significant rise in board oversight of political spending, reporting that boards at 31% of S&P 500 companies now explicitly acknowledge, either in their board committee charters or in policies posted on their websites, that the board, in some capacity, has oversight responsibility for the company’s spending in political campaigns, up from 23% in 2010.
In the updates to its proxy voting policies issued in November, Institutional Shareholder Services (ISS) changed its policy and now generally supports shareholder proposals requesting greater disclosure of a company’s political contributions, as opposed to ISS’s prior case-by-case approach. ISS specifically noted, however, that in making its determination, ISS will consider a company’s disclosure of its oversight mechanisms. Now that ISS will generally recommend that shareholders vote in favor of proposals seeking enhanced disclosure of political spending, issuers should consider whether they have established appropriate mechanisms for board oversight of political spending and whether they have provided appropriate disclosure of their political spending and the applicable oversight processes. ISS also broadened its policy on lobbying activities to clarify that the policy applies to proposals seeking information on a company’s grassroots lobbying activities, not just direct lobbying, as well as to a company’s broader efforts to inform or sway public opinion.
In late January, the American Federation of State, County and Municipal Employees (AFSCME) announced a lobbying disclosure initiative that it characterized as a natural extension of the ongoing shareholder campaign to encourage greater political spending transparency and accountability. AFSCME announced the filing of shareholder proposals at 40 corporations, for votes at 2012 shareholder meetings, urging companies to report on lobbying expenditures, including indirect funding of lobbying through trade associations. Among other things, these proposals will call for disclosure of companies’ policies and procedures governing lobbying, including by trade associations, payments used for direct lobbying as well as grassroots lobbying communications and decision-making processes and oversight by management and the board. In light of this recent upsurge in shareholder activism and increased investor focus on political and lobbying expenditures, directors and executives of public companies should carefully consider the adequacy of their company’s policies and procedures, internal controls and oversight mechanisms with respect to political and lobbying activities and expenditures, as well as related disclosures in their public reporting. Among other things, companies should consider the following:
- whether recent shareholder scrutiny of corporate political spending should serve as a catalyst to reassess strategic corporate political contributions and other political spending;
- whether the board should have greater oversight of corporate political and lobbying contributions as a mechanism for establishing broader corporate responsibility for corporate strategies that employ political spending;
- the level of shareholder support for, and the potential for shareholder displeasure with, corporate political and lobbying spending directed toward accomplishing corporate strategies, and the degree to which such spending is an effective means of achieving corporate goals; and
- whether greater transparency of corporate political spending should be afforded the shareholders, bearing in mind that enhanced disclosures could subject the company to criticism by shareholders, the press and other critics.