Who’s Afraid of Shareholder Democracy?

December 11, 2014
Shareholder chart

The U.S. Chamber of Commerce, one of biggest corporate trade associations, and ALEC, one of biggest corporate lobbying groups are both startlingly hostile to shareholders.  At two recent meetings in Washington DC, these two powerful groups -- who frequently hold themselves out as speaking for the business community -- grumbled about shareholders being too pushy.   

In particular ALEC and the Chamber don’t like that one of the top topics of shareholder resolutions over the past few years has been transparency of political spending both in elections and in lobbying expenditures. Just this year, five public firms witnessed a majority of their shareholders vote in favor of such political transparency. Those firms in case you were curious are Sallie MaeLorillard and Valero Energy, where a majority voted for disclosure of lobbying — and Dean Foods and Smith & Wesson, where a majority voted for disclosure of campaign spending.

Ownership, as they say, has its privileges. One of the points of buying stock rather than just loaning a company money is by actually buying a little piece of the firm, the shareholder gets a tiny voice in how that firm is run. Apparently the Chamber and ALEC do not appreciate shareholders, well, acting like they own the joint. 

Of course, shareholders don’t get to run the firm day to day, but they do get to pipe up once a year at the annual general meeting (AGM) by voting on the board of directors, the auditor, management proposals and shareholder proposals.

As reported in Bloomberg BNA by Kenneth P. Doyle, this attention by shareholders on corporate political spending is rubbing the President of the U.S. Chamber of Commerce the wrong way. “The whole thing comes down to efforts by some to stop the business community” complained President Thomas Donahue at a December 3rd conference sponsored by the U.S. Chamber Foundation.

Meanwhile the American Legislative Exchange Council (ALEC) was also meeting in DC on December 3rd and they too were peevish about shareholders having the temerity to ask where corporate money in being used in politics.  As reported by PR Watch, at the ALEC meeting there was a workshop titled “Playing the Shame Game: A Campaign that Threatens Corporate Free Speech.”

This is all a little surreal since these are shareholders after all who at the end of the day would like a reasonable return on their investment, like any good capitalist. If anyone is for businesses turning a profit, it is the people whose life savings are tied up in these firms and thus it is reasonable to ask if money spent on politics is money spent wisely.

From the press reports of these two DC meetings, it sounds like the Chamber and ALEC may be pining for the 1950s.  Back then, shareholders almost never brought up social issues on the proxy. One of the few exceptions was James Peck, a white civil rights activist who had the “crazy” idea that blacks and whites are equal. Peck partnered with black civil rights lawyer Bayard Rustin to ask Greyhound to desegregate its buses through the corporate proxy card. James Peck failed at every turn in the early 1950s. He was met with a wall of resistance from the company, the SEC and the courts. And it was like that for other shareholders for two more decades.

This all changed with a case called Medical Committee for Human Rights v. SEC brought by shareholders of Dow who complained about its production of napalm during the Vietnam War.  The case was litigated up to the D.C. Circuit in 1970. The court found that the shareholders should be able to vote on a broader array of issues because:

[w]e think that there is a clear and compelling distinction between management’s legitimate need for freedom to apply its expertise in matters of day-to-day business judgment, and management’s patently illegitimate claim of power to treat modern corporations with their vast resources as personal satrapies implementing personal political or moral predilections. 

A key factor in the case was the fact that Dow’s own documents showed “that the decision to continue manufacturing and marketing napalm was made not because of business considerations, but in spite of them…” The Dow case was a turning point in the rights of shareholders.  Shortly thereafter the SEC revised its rules to allow political and social shareholder proposals.

And shareholders have been exercising this right ever since. Now in a typical year, hundreds of shareholder proposals are filed at firms. Today many of the shareholder resolutions are about sustainability and environmental issues like climate change, greenhouse gases, pollution, genetically modified food, and impacts on public health of manufacturing. 

A report from the Sustainable Investment Institute (Si2) which tracks these things noted, “[i]nvestors concerned with environmental and social issues filed 454 shareholder proposals at U.S. companies in 2014, a big jump from 402 in 2013 and far more than in any previous year.”

Ever since Citizens United in 2010 there has been a notable uptick in shareholder resolutions on the transparency of political spending. And the votes on political transparency this year averaged (as of August 2014) 23.7%. This is remarkably high given how broadly public companies are held. Which might explain why some corporate groups who are fond of spending secretive “dark money” are having a toddler style temper tantrum just because shareholders are exercising their right to vote their proxies.

The alternative to the private ordering that shareholders are engaged in is a generally applicable rule from the SEC providing uniform disclosure of corporate political spending, which is also popular among shareholders if a short review of the over one million comments filed at the SEC is any indication. 

If the Chamber and ALEC bristle at shareholder democracy where there is an actual ownership stake, one can only imagine what they think of real democracy where every citizen over 18 no matter how rich or poor, investors and non-investors alike, gets to vote. 

(Photo: Thinkstock)

The views expressed are the author's own and not necessarily those of the Brennan Center for Justice.