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Who’s Afraid of Shareholder Democracy?

Business lobbies love to preach the virtues of ownership and enterprise. They react differently when the tables are turned.

December 11, 2014

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.