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A Trump Administration Plan that Could Boost Corporate ‘Dark Money’ in Elections

A Securities and Exchange Commission proposal could limit shareholders’ ability to rein in secret campaign spending by big companies.

November 19, 2019
Drew Angerer/Getty

The Trump admin­is­tra­tion is push­ing a proposal that could change how much untrace­able “dark money” corpor­a­tions pour into future elec­tions.

The draft rule change was unveiled by the Secur­it­ies and Exchange Commis­sion this month. It would limit share­holder propos­als, which are one of the ways that the stock­own­ers of publicly traded compan­ies get them to change their beha­vior.

Share­hold­ers have had the right to submit propos­als that are voted on at annual meet­ings since the 1940s, as well as the right to submit propos­als on social issues ever since a 1970 federal court case called Medical Commit­tee For Human Rights v. SEC. This case was about the efforts of a share­holder of Dow Chem­ical who wanted the company to stop produ­cing napalm for use in the Viet­nam War. The court said there was evid­ence that the company contin­ued to sell napalm to the U.S. milit­ary despite the fact that it was bad for busi­ness.

As the court wrote, “The manage­ment of Dow Chem­ical Company is repeatedly quoted in sources which include the company’s own public­a­tions as proclaim­ing that the decision to continue manu­fac­tur­ing and market­ing napalm was made not because of busi­ness consid­er­a­tions, but in spite of them; that manage­ment in essence decided to pursue a course of activ­ity which gener­ated little profit for the share­hold­ers and actively impaired the company’s public rela­tions and recruit­ment activ­it­ies because manage­ment considered this action morally and polit­ic­ally desir­able.”

As such, selling napalm was an appro­pri­ate subject for share­hold­ers to raise on the corpor­ate proxy. Shortly after this case was decided, the SEC issued rules that allowed for share­holder propos­als on social and polit­ical issues.

Since the Supreme Court’s 2010 ruling in Citizens United v. FEC, which allows corpor­a­tions to spend an unlim­ited amount in elec­tions, share­hold­ers have used their proposal power to demand an end to dark money in elec­tions from corpor­a­tions. Share­hold­ers have also asked for better trans­par­ency about corpor­ate spend­ing on lobby­ing, as well as better stances on climate change and sustain­ab­il­ity.

Accord­ing to Si2 (the Sustain­able Invest­ment Insti­tute) which tracked these types of share­holder propos­als in 2018, “80 resol­u­tions ask[ed] compan­ies to disclose polit­ical activ­ity spend­ing and 80 more ask[ed] compan­ies to address climate change risks.”

Because of these share­holder efforts on dark money, led by the advoc­ates at the Center for Polit­ical Account­ab­il­ityover half of the S&P 500 compan­ies have become more trans­par­ent about their polit­ical spend­ing, includ­ing their lobby­ing. Another factor in their success has been proxy advisors — firms that suggest how insti­tu­tional investors should vote on share­holder propos­als — who have also embraced ending corpor­ate dark money.

But all of that progress could come to a screech­ing halt if the Trump admin­is­tra­tion’s proposed rule change is adop­ted, because it would make it much harder for retail investors to make share­holder propos­als. The current rules say a share­holder must have owned at least $2,000 of stock for one year in order to submit a proposal. The new rule would require a share­holder to hold that sum for three years, $15,000 worth of stock for two years or $25,000 worth of stock for one year. This is all meant to reduce the number of share­hold­ers who are eligible to submit propos­als, favor­ing richer Amer­ic­ans.

The rule also makes the require­ments for relist­ing a share­holder proposal more strict, thereby making them less likely. One of the ways that share­hold­ers have achieved success with publicly traded compan­ies over dark money has been that they didn’t just ask politely once. In some cases, share­hold­ers had to bring up dark money year after year before a company would change its beha­vior.

But the SEC has rules on asking the same thing again: a share­holder proposal needs to get a higher and higher share of votes to be on the proxy a second, third, or fourth time. Presently, the relist­ing require­ments are winning 3 percent after the first appear­ance on the proxy, 6 percent after the second appear­ance, and 10 percent there­after. The new rule proposes to change the relist­ing vote thresholds to 5, 15, and 25 percent, respect­ively. This is not so subtle attempt to make multi-year engage­ments with manage­ment over big issues like campaign finance or climate change much more diffi­cult to wage.

And at the same time the, the SEC is push­ing a rule change for proxy advisors. When proxy advisors gave advice to vote against dark money, many insti­tu­tional investors voted to open corpor­ate polit­ical spend­ing to more trans­par­ency. The new proposed rule would require proxy advisors to give target compan­ies the right to review the advisors’ reports before they are sent to investors. This would allow publicly traded compan­ies to dispute the inform­a­tion in the proxy advisors’ reports, thereby adding extra steps into the process.

Proxy advisors have also been influ­en­tial on exec­ut­ive pay. Thus, it is no acci­dent that the proxy advisor rules and the share­holder owner­ship thresholds would be changed at the same time. These proposed rules are two sides of the same coin. They both aim to make manage­ment win more fights on share­holder votes, even if what they want to win is the abil­ity to spend more corpor­ate dark money in future elec­tions.

The good news is that these proposed SEC rules still have to go through the normal public comment period. The commis­sion should hear from investors and citizens that these changes would be steps in the wrong direc­tion.

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