Shareholders at the Gate: The Increasing Pressure on CEOs for More Transparency

The average share of votes in favor of proposals that require corporate executives to disclose political and lobbying spending is trending up. But a new SEC regulation will make it harder to resubmit blocked proposals.

 

 

 

Earlier this year, a proposal to disclose Ford’s political spending obtained the support of a small portion of shareholders, 5.88 percent. The share of Disney shareholders that voted for transparency in political spending was not far from a majority, however, at 38.9 percent. 

 

Disney’s lobbying strategies and beneficiaries are one of the greatest secrets of corporate America. Mickey Mouse was created in 1928, and the character is so valuable for Disney that the company has done everything in its power to retain the copyright. Its lobbying efforts proved so effective that the United States changed its copyright law twice, in 1976 and in 1998, to prevent the character from entering into the public domain. Full transparency on Disney’s lobbying expenditure would change the entertainment industry. And, as a side effect, it would probably set Mickey Mouse free (the next expiration date for his copyright is 2024).

 

A ProMarket analysis reveals that the average share of votes in favor of shareholders’ proposals to increase transparency on corporate lobbying and political spending is trending up. A famous finance book about leveraged buyouts in the eighties was titled Barbarians at the Gate. Now, shareholders are at the gate of corporations’ most sensitive policies. Or at least they were, because now the SEC, Wall Street’s top regulator, has proposed a new set of rules that will make it harder to resubmit proposals that were outvoted in the past and will curb the influence of the proxy advisory firms that advise institutional investors how to vote. 

 

In 2019, shareholders of the 250 largest public corporations in the United States had to vote on 21 proposals to disclose corporate lobbying expenditures and on 14 proposals to disclose political spending. The average vote for lobbying proposals was 28 percent, for political spending 37 percent. What is more relevant is that the share is steadily increasing every year. For lobbying spending, it was 9 percent in 2010, for political spending 23.5 percent. So far, none of the proposals on lobbying spending have passed.  

 

Corporations are already required to report their lobbying activities on a quarterly basis. However, not everything is visible: state-level lobbying is far less transparent than federal lobbying and corporate expenditures toward trade associations that lobby on behalf of firms are often not disclosed. Investors are worried that secret lobbying strategies may contradict companies’ public statements, creating a reputational risk. For example, many pharmaceutical companies publicly support a patient’s access to affordable medicines, yet also funded the Pharmaceutical Research and Manufacturers of America’s $100 million campaign that defeated a California initiative to lower drug prices.

 

Two Democratic representatives from California, Salud Carbajal and Zoe Lofgren, have presented a bill to amend the Securities Exchange Act in order to require public corporations to fully disclose their political expenditures.

 

 

 

Proposals are resolutions to be voted on at shareholder meetings. There are two types of proposals: Management proposals are put forward by the company’s management, and shareholders’ proposals are proposed by its shareholders. The SEC shareholders’ proposal rule (Rule 14a-8) requires that companies include shareholder proposals in their proxy materials, if they respect a list of requirements. Proxy materials are documents that may help shareholders, through proxy advisory firms or directly, to make an educated vote.

 

Shareholders are at the gate, but the gate will be higher after the final approval of these new SEC regulations. Under current rules, to be eligible to submit a proposal, a shareholder proponent must have continuously held at least $2,000 in market value or 1 percent of the company’s stocks for at least one year by the date the proposal is submitted. After the SEC amendment, a shareholder would be eligible to submit a proposal if the shareholder has continuously held at least $2,000 of the company’s stocks for at least three years; or $15,000 for at least two years; or $25,000 for at least one year.

 

Additional constraints would limit resubmissions of shareholder proposals. The draft regulation would not allow shareholders to aggregate their securities with other shareholders to meet the applicable minimum ownership thresholds to submit a Rule 14a-8 proposal. According to the SEC, “allowing shareholders to aggregate their securities to meet the new proposed thresholds would undermine the goal of ensuring that every shareholder who wishes to use a company’s proxy statement to advance a proposal has a sufficient economic stake or investment interest in the company.”

 

SEC Commissioner Robert Jackson voted against the proposed amendments. The new set of rules, he argued, “simply shields CEOs from accountability to investors. Whatever problems plague corporate America today, too much accountability is not one of them.”

 

Jackson’s team ran a simulation of the effect of the new rules. According to their results, “under the proposed rule more than half of shareholders’ proposals restricting executive stock sales—designed to align managers’ incentives with investors’ for the long-term—would be excluded from corporate ballots for three years.” Moreover, proposals including political spending, board diversity, and climate change “would also be significantly impacted under the proposed rules.”

 

Jackson’s team extracted data on shareholder proposals from the ISS Analytics database for each year from 2004 to 2018, resulting in a total sample of 8,319 shareholder proposals. ISS is one of the two major proxy advisory firms; the other is Glass Lewis. According to some estimates, the two companies have a combined market share of close to 97 percent.

 

The simulation’s results show that the new rules will exclude 35 percent of the proposals to separate the roles of CEO and chair, 50 percent of the board diversity proposals, nearly 65 percent of the reports on climate change proposals, and 40 percent of the political spending disclosure proposals.

 

With the new SEC regulation, all the proposals between the two lines will be off the ballots

 

Whether a more diverse board, environmentally responsible policies, and high lobbying spending increase shareholders’ long-term value is a topic of ongoing scientific debates. What is certain is that, with new SEC rules, corporate CEOs will be protected from the shareholders at the gate. It is worth noting that institutional investors vote on behalf of their investors, who, for a large part, are workers saving for retirement. Consider a worker holding equity in an oil company through a mutual fund: As a shareholder, she might be interested in profit maximization regardless of environmental consequences. As a citizen, she would be among the victims of pollution. Lacking knowledge of the company’s political spending deprives the shareholder of her right to keep the firm accountable for its actions. Raising the bar for investors to propose company policy changes allows firms to escape their responsibilities to their shareholders.

 

With the new SEC regulation, all the proposals between the two lines will be off the ballots

 

At the end of August, Business Roundtable, a corporate CEO lobbying group, issued a statement arguing that companies should no longer advance only the interests of shareholders. Instead, the group said, they must also invest in their employees, protect the environment and deal fairly and ethically with their suppliers. The new SEC regulation will give them more power to interpret this promise as a discretionary and flexible commitment, with even less accountability to shareholders and other stakeholders than in the past.

 

However, there is still time to have a fair discussion on the proposed regulations on shareholders’ voting rights and proxy advisory firms’ power. 

 

We invite ProMarket readers and contributors to benefit from the opportunity offered by the 60-day public comment period and send their opinions to the SEC. Please send your comments to rule-comments@sec.gov and to our address as well, ProMarket@chicagobooth.edu. The three best proposals we receive will be published in this blog. 

 

We are also offering these prizes: The first place winner will receive a free ticket to the Stigler Center’s flagship event, the 2020 Antitrust Conference in Chicago. The authors of the second and third best comments will receive a Capitalisn’t t-shirt.   

 

 

 

The ProMarket blog is dedicated to discussing how competition tends to be subverted by special interests. The posts represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty. For more information, please visit ProMarket Blog Policy.