Accountability After Citizens United – Panel One Transcript
Panel 1: Can Shareholders Save Democracy?
Ciara Torres-Spelliscy: Good morning, it is such a pleasure to have you all here today. My name is Ciara Torres-Spelliscy. I’m an attorney at the Brennan Center where I work on the issue of money and politics. And just so that we are all on the same page, I wanted to reiterate the central holding of Citizens United. It says that corporations and unions can spend their treasury funds on electioneering communications and independent expenditures. Back in the world of plain English, that means that corporations can buy political ads. And this is a change. This is a change that’s takes us back to basically 1947. One of the ways that I explain this-- because I talk about Citizens United all over the country-- and sometimes I’m talking to people who are experts in campaign finance law and sometime I’m talking to people who are experts in corporate law. But one metaphor that I find that everyone can wrap their heads around is this one: Before Citizens United if a CEO of a publicly traded company wanted to buy a political ad in a federal election, they had to reach into their pocket and pull out their personal checkbook. And then they could write a check as big as they wanted to purchase a political ad in a federal election. And that’s the Buckley right. But after Citizens United you can use the other hand. You can reach into your other pocket if you’re a CEO and pull out the corporate checkbook, the one that has the corporate logo, the one where the bill does not go to the CEO’s house. And I think this is the paradigm shift for me. And it means that corporate managers can spend what Justice Brandeis used to call “other people’s money” in politics. I really fear that this is one of the situations where the incentives run entirely the wrong way. On the one hand it may encourage arms-race spending among corporate competitors because you don't want to be the odd man out who isn’t spending and giving. On the other hand, there’s an incentive for dark spending, for nontransparent spending, where you spend, but you don't put your name on the advertisement. And for me, this raises a host of corporate governance issues and fortunately for us we have some of the world’s corporate and securities experts to help us muddle through this new legal terrain. I’m going to introduce the panel before I hand it over to Professor Jackson. Robert Jackson is a Professor of Corporate Law at Columbia Law School. Chancellor William Allen is Counsel at Wachtell, Lipton, Rosen and Katz. He is the former Chief Judge of the Court of Chancellery of the State of Delaware and the Head of the NYU Center for Law and Business. John Coates is a Professor of Law and Economics at Harvard and Jennifer Taub is currently a professor at the Isenberg School of Management at the University of Massachusetts at Amherst and she is incoming faculty at Vermont Law School in the Fall. Professor Jackson, could you start us off?
Professor Robert Jackson: Thank you and I want to start by saying how delighted I am to be here and how important this conference and this discussion is to this issue that’s just emerging for those of us in the corporate and securities law area. One thing that you’ll hear from us today is we’re going to be corporate law scholars a little bit outside the ambit of our expertise because we’re trying to talk a little bit intelligently about election law. But we’ll do the best we can and I’ll certainly try and offer up some insights about this difficult and important issue.
So I think it’s important to start by distinguishing what Citizens United says and what it doesn’t. What Citizens United holds as Ciara just pointed out is that corporations are entitled to spend corporate funds on political speech or if you prefer, limitations on this kind of spending will be afoul of the First Amendment. What it doesn’t tell us, what Citizens United doesn’t say is how corporations decide whether or not to use this power, and how it will be used if they do. And this is the issue I’d like to give some attention to today and I think the panel will talk about.
We have a large body of law in corporate law that tells us generally how corporations make decisions. In general this body of law uses what we call the Business Judgment Rule, which says that directors and executives get to decide how corporations are run. And this is a good rule for decisions that are made on a day-to-day business basis of the corporation. Why? Because in general, we think that directors and executives, the insiders of the corporation have superior information to shareholders and it’s a good rule to let them make their decisions more or less not subject to oversight by other entities. But there are many important exceptions to this rule, recognized both by the Delaware courts and by the Congress over the years where we don’t allow directors and executives to make these kinds of decisions without some oversight and participation by other constituents. So for example, corporate law gives shareholders the right to vote on certain fundamental transactions, like mergers and acquisitions. The law also requires that independent directors oversee some decisions, like executive pay decisions for example, where the interests of directors and shareholders are not perfectly aligned. And the law also requires special disclosure with some decisions. Corporate officials, directors and executives are allowed to make some decisions but they have to tell shareholders in very express, detailed terms exactly what they’ve done and those tend to be situations like for example transactions where directors have a personal conflict. These have to be disclosed to shareholders in many cases.
So really we have two sets of corporate law rules for deciding who decides what a corporation does. One set, the Business Judgment Rule generally applies to day to day business decisions. Another set, the kind of exception rules I’ve described, apply to other kinds of decisions where the interests of directors and executives are not perfectly aligned with those of shareholders. And the question I’d like to focus on today is: What kind of decision is the decision to spend corporate money on politics? And I think it’s clear that this is the kind of special decision to which special rules should apply. And I’ll give you a number of reasons why I think that’s true.
First, there are at least some political spending situations where directors’ and executives’ interest will not be the same as those of shareholders. There are many to be sure, where the interests of directors and executives will be perfectly aligned with those of shareholders. Here I have in mind decisions like the decision to lobby a federal agency for rules favorable to your industry. There I think there might be some case that directors and shareholders have the same interest in mind. But I can think of lots of situations that don’t fit that case and here I have in mind donations directly to political candidates like the ones that issue in the Citizens United case itself. For example, you can imagine a situation where the CEO of a corporation is a Democrat who wants to run some day for the House of Representatives in a liberal district. And you can imagine another corporation where you have a CEO who’s a conservative Republican who wants to run some day for the House in a conservative district. And you can imagine that the decisions these CEOs will make about whether and how to give money to political causes will be very, very distant from the interests of shareholders in a case like this. They’ll have their own interests in mind. And because we don’t think that shareholders choose their investments based on the politics of the CEO, at least I don’t, you kind of get the sense that you’re not going to have decisions that are completely aligned with the interests of shareholders.
Another reason why the interests might not be aligned in the way you’d expect is that these decisions are actually of considerable financial significance. I mean one argument to use the Business Judgment Rule to defer to directors and executives would be that these are small decisions. This is small potatoes for most public corporations. I guess I have two things to say about that. The first is that on the numbers to the extent that we have any understanding of what corporations are doing in this area, that’s actually just not true. Hundreds of millions of dollars are spent each year by corporations on politics, both through intermediaries and through corporate political action committees and I think Professor Coates will give you a better idea of exactly what those numbers look like. But what I’ll say for now is that these decisions actually have pretty substantial financial significance. But even if that weren’t true, the thing I want you to focus on would be that they have special expressive significance, that shareholders might care about these decisions in a way they don’t care about other day-to-day business decisions. And for this reason we think that they’re special, different for the ordinary business decisions that we usually in corporate law give deference to directors and executives on. So in a paper that I published with Lucian Bebchuk in the Harvard Law Review in the Fall, I proposed a number of special rules drawn from existing corporate law, all the kinds of special rules that I described to you at the outset, that we could use to help align the decisions that corporations make on political spending with the interests of shareholders. And I'll just summarize them briefly. The first is that shareholders should be given a right to vote on corporate political spending. Now, I’m sort of happy to consider the actual, the precise nature of the rule, but I’d say two things about what I’d want in this respect. First, I’d want shareholders to have some kind of say about the aggregate amount of spending the corporation does, by the way as Ciara has pointed out in her excellent work for the Brennan Center, this is not an unusual rule in the world. The United Kingdom has had a rule like this for some time. But I’d want more than that actually, that wouldn’t be enough for me. And the reason is that giving shareholders the right to say yes or no on the aggregate budget, leaves a lot of room for spending under that budget that’s totally contrary to shareholder interests. So I’d want to change corporate law to allow shareholders to vote on by-laws that would bind the corporation as to who can receive money that’s being spent in politics. So these are the kinds of rules I would offer up for shareholder voting, but in addition to that I’d want to give oversight for these decisions within the corporation to independent directors.
One more thing I want to say about shareholder voting by the way. To the extent that this seems extraordinary, remember that the Congress has just last year passed a new rule in the Dodd-Frank Act that’s going to give shareholders a vote on executive compensation. So it’s not at all uncommon to take this kind of special decision and give shareholders a say and as corporate law has been changing over the last few years, it’s totally consistent with the direction that corporate law has been moving.
With respect to independence of directors I would give oversight of these decisions not to executives but instead to directors who are independent from them. As I mentioned earlier, we already do this in corporate law with respect to a number of types of decisions, sometimes mergers and acquisitions where there’s a conflict at issue, always executive pay, as a matter of federal law. And I would allow independent directors to oversee corporate political spending for exactly the reason you’d expect, again, that the interest of directors and executives are not perfectly aligned with shareholders. Now an answer that you might hear from corporate lawyers about these kinds of proposals is that we don’t need to worry about all of this because for two reasons. First, markets will naturally wash out political spending that’s not in shareholder interests. And the reason they’ll do this is that market prices and market for corporate control keeps close watch over directors who make mistakes with respect to shareholder money and punishes them over time. You should expect over time markets will get rid of this problem.
Another reason is that shareholders have the right to elect directors in Delaware and most corporations have annual elections for directors. For this reason if shareholders don’t like what directors are doing they can simply throw them out over time. The reason I think that this doesn’t work in this area brings me to my third reform that I would make in this area, which is to add disclosure. To the extent that you don’t believe that shareholders and directors need special rules in this area because of markets or directors’ elections, at least you’ll agree that shareholders have to know what’s happening in order to do something about it. They need to actually have a sense for what’s happening on political spending in order to change director elections and in order for markets to work with respect to decreasing this kind of spending, or rather cabining it to the interests of shareholders. And so I would say that we need to have much more robust disclosure and I would say that any shareholder voting proposal, including the current Shareholder Protection Act needs to be accompanied by much more extensive disclosure in this area. For the paper that I wrote in the fall and John can say more about this, I tried very hard to come up with information on exactly what corporations are spending in this area and all I can say is that the disclosure regime is astonishingly incomplete. It’s true that you can look through Form 990s for example and try and pull out information about what corporations are doing but it’s extremely difficult. The data we do have are about corporate PACs which are of course a different question really from the use of the corporate treasury for corporate political speech. And so I’d say that we need a much more robust disclosure regime, in particular with respect to donations to intermediaries that engage in political spending which we show in the paper actually seems to be a very, very large source of corporate political speech.
So I guess I’d summarize just by saying that whatever you think in this area, there’s no reason as a matter of corporate law to my mind to think of this as the kind of ordinary day-to-day business decision to which directors should be given business judgment deference. Instead this is the kind of special decision over which we’ve always given different types of constituencies supervisory power over the Board of Directors and the kinds of changes we should make in this area in the wake of Citizens United will focus not on its principle holding as to what corporations will do but this is the question I’ve raised today which is, who decides how corporations will use this power. Thank you.
Ciara Torres-Spelliscy: Thank you. Chancellor Allen?
Chancellor William T. Allen: Well, I too am delighted to be here and I have to immediately disclaim any expertise on either election law, constitutional law or how to get here. It took me a little while but I’m happy to be here. I’m more skeptical than probably anyone in the room that there’s a problem, so I’ll be a discordant note, I suppose, in the conversation today. The title for this panel is: Can Shareholders Save Our Democracy? If our democracy is in trouble, shareholders are not the place to go to save it. Modern security markets turn over with very great rapidity, the stocks are owned internationally, they’re owned by hedge funds, by large institutions. These are not the institutions that if there is a problem with the democracy that we can reliably depend upon.
Now my big question is, is there a real problem from corporations making political contributions under the change in the law that Citizens United brought about. The arguments that [Professor] Robert [Jackson] makes for example, which I don't oppose by the way, normatively I believe business corporations should not be in the business of making political contributions. It’s not what the institution is designed for. But I don't think there is a huge problem. The reason I think in the absence of proof otherwise that there’s a huge problem is not because of the markets for corporate control which are very imperfect, take a long time to work out; is because business corporations and the corporation that was involved in the Citizens United case was not a business corporation it was an expressive organization designed to make political points which seems to me completely different kind of institution than a business corporation. Business corporations operate with a lot of constraints around them. Some of the constraints are the ones that we, were must mentioned, the constraints of shareholder groups monitoring takeover markets and all that. But the most, the primary constraints are product markets. And product markets are not segmented ideologically. So, if a corporation, I agree disclosure is completely significant, if a corporation decides to align itself with a controversial social issue or political party issue, it is going to distance itself from a big part of its product market individuals. This is extremely dangerous in a competitive market. So that when we look at where corporations for example make charitable contributions, who do they make charitable contributions to? This sort of white bread, non-controversial institutions like educational TV stations perhaps or the art museum or early children’s education, they don't want controversy because controversy is going to signal to the product market who it is and for this reason alone I don't think you’re going to see a corporation wanting to involve themselves very much with corporate funds in political affairs. Now that position is critically related to the fact that markets have to be able to know what in fact corporations are doing and I think that is essential. The notion of a boycott is a perfectly valid thing and it will help keep business corporations working on their business questions, not on their, not on a social agenda.
The notion that this is a serious agency problem however is really I think a silly way to change law to try to imagine that there’s a CEO who is going to leave his CEO job and become a congressman and therefore say, well, he could be spending…. I need a lot more in the way of data to change law based upon this notion that this is an agency problem. I don’t disagree that if we could have a specials rule for political speech, the problem is what constitutes political speech. If the rule goes to making expenditures directly or indirectly in favor of a particular campaign, then I don't have a problem with it. My problem with changing the law is and John’s going to have a study that gets to lobbying, lobbying Congress to change the law or lobbying a legislature could be regarded as political by somebody and lobbying is actually a very important, I mean it doesn’t cost a huge amount for most firms to lobby. But it’s very important for business firms to be effective. If a new regulation on clean air is going to come out, and it’s going to raise the cost of production a great deal, it’s the responsibility of the firm to be there to inform the process at least about the effects this is going to have and maybe to share the technological information it has about different ways to regulate. So we need to have the producers in our economy sharing information with the regulators. And if we make more difficult or impede in any way that lobbying process we’re creating a public policy problem for ourselves. I know K Street is not a very popular thing in the American imagination and not with me either. But the fact is that lobbying is an important vital public function and if in our regulation of political speech we somehow get to regulate or impede company’s lobbying activities, I think we’ve done ourselves a disservice.
The third point I would make is I can conclude really, because I made my first point which was the only point worth hearing – I disagree a little bit with some of the things that are in, these are the two papers that are out on this subject. I think what is important is to look at these problems not as legal problems but as social problems that is it evaluate changes in the law in the context of the real markets within which firms operate. And when we look at, for example, the law whether shareholders can enact a bylaw that says no political contributions, I think what we really have to look at is if shareholders adopted even a precatory resolution that said, don’t make any direct contributions to political campaigns, narrowly stated, I think boards in this environment, boards of directors would adopt it. There really isn't any leverage on the other side of that issue. If the institutional investors get behind a prohibition of direct contribution it’ll happen. I mean staggered boards which are much more vital to corporations than making political contributions, are going the way of there horse and buggy because institutional shareholders are insisting on it. So I don't think we have to look at the technical corporation law very much to know that if the shareholders don’t want direct political expenditures they can get it. So I’ll conclude my remarks with that. My thought about product markets being important here is hinged upon some disclosure. I mean I think it’s essential that there be reasonable disclosure of direct or indirect political spending. And I also think it’s essential that we don’t’ trample on lobbying in the process of regulating.
Ciara Torres-Spelliscy: Thank you. Professor Coates?
Professor Coates: Thank you very much. I’m delighted to be here as well to be able to talk to this issue. Like the others on the panel I also am a total neophyte in the election law area and even constitutional law which I in theory was taught at NYU Law School some time ago but I’ve forgotten large chunks of it sorry, to confess, but I did go back and look at it in the wake of Citizens United. And I think actually the one I’ve said this joke to some of you, the one good thing to come out of the decision is suddenly everyone on the business side of law schools and in business schools people who have not thought carefully about election law or the relationship between election law and First Amendment jurisprudence suddenly are interested in it for the first time. Because it is going to I think contrary to [Chancellor] Bill [Allen]’s intuition, my intuition is different. I think over time, as was suggested at the outset of the day, that the ability to get directly involved in elections is going to be too great a temptation. In fact, it’s going to be a necessity in some instances for corporations to be able to continue doing what they in principle want to do which is to serve consumers and their shareholders in a sensible way, and then once they’re in that environment then much more serious problems can come about of the kind that has already been alluded to today, corruption at the most extreme.
I want to make first a couple observations, just to make sure everybody heard it. Bill [Allen] and Robert [Jackson] are in total agreement that disclosure of corporate political activity would be an important legal reform. And I think it’s important that whatever other disagreements we might have about the facts, I’m also in agreement with that. It’s something that still isn’t the law and doesn’t look likely to be the law generally for public companies any time soon. And that’s a sad statement, frankly, about our democracy. And so if nothing else, I hope we can all walk away with at least that commitment to the outcome.
The second thing I want to note, and this is just a very general point, but I think it’s really important to keep in mind, all the studies that have been done of corporate political activity for many years, by many people in business schools, that long predated interest in this topic, are consistent that different kinds of political activity are complements. So lobbying, I completely agree with Bill, serves very important purposes, a good purpose in many respects, to make sure that legislators are informed about the effects of potential reform, legal change, rule change on various industries and ultimately on consumers and shareholders. So I’m completely in favor of the idea that in that area there ought to be free and open speech. But lobbying becomes far more powerful when it’s accompanied by the ability of the person paying the lobbyist to directly threaten a particular legislator’s re-election chances. And so in general, across lots of studies over many decades, the companies that are most active in lobbying also are most likely to have set up a corporate PAC. Back when soft dollars were permitted, they were most likely to have used soft dollars to influence election campaigns. And in my estimation, over the next many years if nothing changes, they will be the most likely to get involved directly in election expenditures, or if there’s a risk of a boycott to do it without disclosure through longer conduits. So we don't really, in a minute I’m going to present some data on lobbying, but I don’t, what I don’t want the takeaway to be, as Bill suggested, that lobbying somehow directly should be forbidden. But I do think it’s important to bear in mind that if and to the extent you think that lobbying can sometimes play a bad role, which many people do, Bill sort of alluded to this too, K Street. Why has K Street got this double edged quality to it? Because sometimes of course lobbyists are not simply about informing the lawmakers but rather influencing the lawmakers; not simply about making sure they’re informed about outcomes but in fact extracting rents, transferring money from taxpayers to corporations. And so lobbying on its own while it has pluses and minuses. When it’s coupled with other kinds of political activity, it becomes much more dangerous. And that’s why I think it’s more important to think about responses to the other more direct kinds of political activity than it would be in some other universe.
So let me give you the punch line of empirical work that I’ve been doing. I’m going to put up this one first. Within the shareholder corporate governance community outside of election law, that’s been going on for decades now. Bill, Rob and others, Jennifer and others have been engaged in lots of debates over how much shareholder power in publicly held corporations would be a good thing. And you can have endless debates over and we have had endless debates over where we should be on the spectrum. I come from a background, I used to work at the law firm that Bill is still associated with at Wachtell, which traditionally views managerial authority as a good thing and shareholder power often can be quite pernicious. So my priorities in all this are not that more shareholder power is necessarily better. One of my colleagues, Rob’s co-author on his Citizens United article with Lucian Bebchuk has taken the opposite view. He’s very much a pro-shareholder person and one of the important pieces of evidence in that debate that we managerialists in the corporate governance have had to confront, which I don’t think we have a good answer for still to this day, is this up on the board which is that G, here, is a measure of shareholder power. And the more shareholder power there is in a publicly held company, basically the better the corporate does. For reasons perverse, whoever came up with this measure did it reverse, so that more shareholder power is a lower number. So that’s why this sign is negative. But basically however measured, and the standard measure here is relationship of stock price to the asset value of the company, how effective the managers are in using corporate assets, they do a better job when shareholders have more power. And that’s a robust finding, it’s been replicated by many, many different people over time.
Now there are lots of debates you can have about whether there’s anything we can do to existing corporate structure to actually improve that value. It may be that we’ve already gotten to the right place for most companies and there’s not much more we can do with it but that’s just a robust finding that was out there already. So to that I want to add contributions, political contributions through PACs, and lobbying. These two things strongly are correlated with shareholder power in the reverse way which is to say the more shareholder power, the less likely in the past 15 years, pre-Citizens United, the publicly held company was to get involved in political activity of any kind, whether lobbying or setting up PACs. For some companies, it seems to me clear that lobbying is so important. Boeing can’t do the job for their shareholders without engaging in lobbying of some kind, however you want to define lobbying. So I don't think again to reiterate a ban on Boeing telling putting in bids and then trying to get the contract for their shareholders would be a good thing for their shareholders. But in general, and this is the real punch line. In general, on average for most public companies those that do get involved in political activity, whether PAC contributions or lobbying, this is all pre- Citizens United, the worse their shareholders do. The lower the value the market places on the companies, with the same industry, with the same assets, controlling for every factor that you can control for. The punch line is even before Citizens United, even with relatively benign in many respects ways that corporations could get involved in the political sphere through setting up PACs and lobbying, the companies that tended to do it tended to do it, I think, the data is most consistent with Rob [Jackson]’s story, which is to say they did it on average in ways that tended to favor managerial interests and harm shareholder interests, not in fact maximize the best value of the corporation. And this is consistent with Adam Smith’s observation 250 years ago that companies with disperse shareholders have a hard time controlling managers. It’s just a basic common sense point. And I think it’s borne out in the political sphere as well.
Now, and just to give you the real picture here, this is true across the board, so if you just take measures of shareholder rights which other people have come up with, I didn’t invent these. Take shareholder dispersion, how many shareholders there are, you get the same results. The more powerful the shareholders, the less political activity on the left, the weaker they are the more political activity. And go back to the original point, the second point I made, which was that political activity is a complement. Citizens United now means we’ve got a whole new avenue to reinforce the power that corporations have had already through lobbying and through PAC activity, to expand the influence of those two others and to have an additional weapon. And so I think this is only going to get worse over time. I think that shareholders are going to find themselves more and more frequently in conflict with management over this. I think well considered, thoughtful managers don’t like this. They don’t, they didn’t’ got to business school in order to play dirty politics. They went to business school in order to sell cupcakes or whatever they sell-- to make people happy with Starbucks coffee and Coca Cola and all the other products that we all take for granted. They didn’t’ go there in order to fight on K Street in order to extract rent from the tax payer. So I think most CEOs who are sitting at large public companies today I hope, exactly as Bill [Allen] suggests, will be receptive to the predictable wave of shareholder activism that‘s going to come, and my study will have a tiny effect on this but it’s going to happy anyway. Because in fact institutional shareholders for good reasons, and this data supports it, shouldn’t have their corporations actively involved in politics. Lobbying is a different story. I have no problem with lobbying and I don’t think as a general matter the shareholder proposals ought to directly attack lobbying but just remember if you control political activity through PACs and now through independent expenditures, you’re going to make whatever influence you can get through lobbying more likely to be the public regarding kind of providing information rather than simply influence.
So I’ll stop there with one last thing I’ll say about product markets. Bill [Allen]’s point is right for Target and for Home Depot and for consumer companies. But I want to remind everybody that most of the corporate money in the country isn't in a consumer market. It’s in a prior market. It’s in an upstream market in which consumer pressures and boycotts either are impossible to organize, unlikely to organize and therefore I don't think the product market constraint is quite as broad and general as Bill suggested, but that’s my only disagreement with his otherwise sensible as usual remarks.
Ciara Torres-Spelliscy: Thank you. Professor Taub?
Professor Jennifer Taub: So thank you. I’m honored to be here also and to learn today that I am a world expert in corporate and securities law. My mother will be honored, something she probably always knew. So my starting point is not the role shareholders should play regarding corporate political spending, but the role they are currently playing, the role they might play in the future and what the implications of that will be.
So the starting point, two observations regarding the present and the future. Presently, shareholders since roughly 2004 have been participating in the process of initiating resolutions to be voted on in annual meetings, thanks to The Center for Political Accountability, and voting on those. I’m going to call these in my talk today “show me resolutions” because these resolutions are asking corporations to disclose how much they’re spending on certain political activities, who’s receiving the money and who inside of the firm is making those decisions. And my focus will be on the 2010 resolutions at 28 firms. And these show me resolutions are non-binding. So this is already happening. The second observation is that there may be a shift of decision making authority concerning corporate political spending from managers and directors to shareholders in particular institutional shareholders through something like a Shareholder Protection Act requirement, which if passed, would require a majority of outstanding shareholders to sanction political spending perhaps over a threshold amount. And I want to draw your attention to one thing, these types of requirements are different in terms of the denominators here. So with the “show me resolutions” in order for one of them to pass, the shareholders only need to receive a majority of the votes cast for and the votes cast against, but if we were looking at a Shareholder Protection Act type requirement, a majority plus one of the outstanding shares would be needed.
So the research questions that arise from these observations are three. First, can we look at the voting records, the most recent and the most successful shareholder resolutions, the “show me resolutions”, to predict how a consent-type resolution might bear out. Secondly, there are gaps in disclosure. We’ve talked about disclosure. I’m talking about disclosure in the other direction, not the disclosure piece of where the money the corporation is committing is going, but the disclosure down the intermediation chain, in that over 70% of the top 1000 firms in the U.S. are, the firms themselves shares, 70% of the shares in those firms are owned by institutional investors that are largely holding those shares on behalf of underlying beneficiaries. Is it easy for those folks, people who own mutual funds for example directly, or folks who are participants in a 401k plan -- can they find out whether some of the money that they have at risk is being dedicated to particular political campaigns? Even given the existing disclosure regimes where mutual funds and certain investment advisors have to disclose, this isn’t even enough for those shareholders and it doesn’t cover the full landscape. And then finally, are there gaps in consent? -- even given a shareholder protection act model in that if 70% of these firms are institutional shareholders who are largely voting, we have the 30% of the true human beings for whom one would think the First Amendment right mostly attaches, who don’t largely vote. Should there be something additional such as a requirement that a majority of those real human beings who invest directly in companies also have to approve such expenditures?
So this next slide is a drawing of actually how firms are organized. It’s meant to challenge footnote 7 in Scalia’s concurrence where he says the following:
The authorized spokesman of a corporation is a human being who speaks on behalf of the human beings who have formed that association, just as a spokesman of an unincorporated association speaks on behalf of its members.
So I’m not sure if it shows up here, but I try to highlight the human beings in yellow. And so we have the corporate manager or director, he is the human being making the spending decisions and then if you look at the configuration of ownership, 70% of owners of institutions, you can’t find the human beings until you go farther down the intermediation chain. And then we have these other individual owners who are humans.
If we go farther down the intermediation chain one example of an institutional investor are mutual funds who hold about 24% of U.S. equities and then you can also see we have some real human beings who hold mutual funds and then we go to the 401k or the other D.C. plans and you get to the plan participants. None of these human beings [down the intermediation chain] obviously cast any votes or have a say in political spending under a proposed shareholder protection act consent regime and even today with whatever disclosure that is happening in terms of a voluntary basis by those firms who are adopting better disclosure standards, who might under a shareholder resolution, these folks have a very difficult time understanding where their money is going.
So on these slides, what I tried to look at is the 8-Ks for voting at 27 of the 28 firms that had “show me” votes. I dropped out Ford because of its unique ownership structure, and what you see here in that first left column is the number of shares outstanding and then half of that. So in a Shareholder Protection Act regime, that would be the amount of votes that one would need to, if a manager had a proposal for how much money should be spent on political contributions, to get that passed managers would need that green bar right there. In contrast, if you look at the, I think it’s the third bar over where you see the total for and against votes cast at AllState in order to, if they wanted to get that passed they would only have needed about half. So you can see that it’s a different number and this is representative of the others, this is the average of all the show me resolutions combined. And what this shows you is that it was a high number at AllState received 40% of the vote. And then this is the average for all the fourteen 8-K’s at those 27 firms, on average 30%.
So this is I guess the important pie chart. If I’m trying to predict looking at the shareholder votes what a, from the “show me” resolutions, what a consent or sanctioning resolution, how it would play out, we have to make some guesses. And I’m realizing that these, we’ve got to make some guesses as to how folks voted on “show me how you’re spending the money, might vote on “go ahead and spend the money.” So I’m making the assumption for the purpose of this talk, that the folks who said, don’t show me, I don’t want to see how you’re spending the money, are likely to be pro-management and just say if that’s how you want to spend it, go ahead. Just an assumption I’m making here. What you can see then is that that’s not enough, if you imagine the same configuration of voters which we would not necessarily have, but just with this configuration of voters, the folks who said don’t show me would not be enough to be able to sanction management’s proposals. One would need another number of voters and it turns out that those who abstained which is about 12%, if you had all of those folks who abstained, and decided to be present but voted abstain and not say if they were for or against, I guess we can call them the swing voters, you need all those to pass a resolution. Now of course there are some shareholders who said, I do want to see what the spending is, they may decide to still approve. But in the, if you want to be the most conservative looking at this, you could say it’s very close here. So what do we look at, all 27 firms, and it’s sort of the same configuration.
Based on this, I would predict that these proposals would pass then. Because I do think having spoken with some institutional investors who are very interested in knowing where the money is going, I’m not sure that they would necessarily feel comfortable saying no to the expenditures.
So what are the conclusions? It’s possible that spending decisions may shift from managers and directors to institutional owners, and also that the interests of institutional owners, money managers, might diverge from those of ultimate investors. This is sort of a missing piece today of the argument. Some of the work I’ve done before is about mutual fund proxy voting and how there may be conflicts of interest that encourage them to favor management’s position over their underlying shareholders. And then the third conclusion is that assuming that we end up with a Shareholder Protection Act type requirement, that in addition to supplement that I think that a disclosure of institutional owner’s votes would be necessary. So this is akin to what Robert [Jackson] was saying, under the Dodd-Frank Act, there is now this requirement that votes on executive pay are disclosed and the disclosure expands to all 13-F Filers, which is institutional owners beyond what right now is required [to disclose] proxy votes. Also I think that the format of the disclosure is really difficult to work with. I think institutional investors should have to roll up their voting up to the parent entity. For many people they choose a fund family, whether it’s Vanguard or Fidelity or whomever, and they want to know how they’re voting and they won’t necessarily be able to use the data at the SEC’s website and figure out the name of the trust of the mutual fund they’re investing in. And I think this should go all the way down the intermediation chain. And then finally I think it makes sense to consider, maybe this is the most radical of the proposals, but to consider that the real human beings who are direct owners in corporations should have to express 50% plus 1 approval of voting.
One last thing I want to say, that I left out. Who are the folks who vote abstain. That 12% I showed you. It turns out that there are a few large fund families that, if you looked at the AllState vote, half of those abstains, or 6% of the outstanding shares, three fund firms [appear to be] voting abstain. And so voting abstain is considered good in the realm of the “show me resolutions”, because by dropping out of, moving from an against vote to abstain you’ve increased the power of the for vote, so that’s good in that realm. In this other realm that was not necessarily, it makes it very difficult to predict where they would vote and also gives them sort of swing voting power as these undecided who now have a certain kind of authority – so it’s again very important that, in AllState I think the 3 firms, well I don't want to name names, but if you were to, a mutual fund owner I think you would want to know if your fund firm was making that deciding vote on political spending. So thank you very much.