If only it were this simple. Image via Wikipedia
Last year ISS, the leading adviser on corporate-governance proposals, changed its policy to recommend shareholders generally vote in favor of proxy proposals to disclose corporate political activities. For most small investors, proxies are those mailings you throw in the wastebasket (along with the class-action notifications). But institutional investors, trustees and other fiduciaries are supposed to consider each proxy proposal carefully and vote in the way that benefits their investors. And ISS carries a lot of clout because its recommendations are considered a seal of approval for the institutional community.
What's wrong with more corporate political transparency? Nothing, in theory. But as attorney Keith Paul Bishop points out below, these proposals often come from unions and other organizations with their own agendas, and may impose unforeseen costs on companies. Bishop has some authority to speak on the topic, which is why I decided to run his thoughts here. A former California Commissioner of Corporations, he's now a partner with Allen Matkins in Orange County, Calif. Note: While Bishop says he doesn't represent any corporations facing such political disclosure measures right now, he could at any time.
Political Spending Proxy Measures: One Size Doesn't Fit All
Keith P. Bishop
What if you went to Starbucks and ordered a tall cappuccino but they said "sorry, we only sell Venti sized coffee"? What if you wear a size 14 and the department stores sold only petite sizes? To be sure, retailers could save a lot of money if they offered only one size, but consumers would find a one-size world to be inconvenient, if not unworkable.
ISS describes itself as the leading provider of corporate governance solutions to the global financial community. Among other things, it provides advice to institutional investors and other clients on how to vote the shares that they own. Although ISS claims that it covers more than 40,000 stockholder meetings for its clients, it has decided that it lives in a one-size only world when it recommends how its clients should vote on stockholder proposals with respect to disclosure of corporate political contributions.
This year, stockholders at many companies will be asked to vote on a wide variety of political spending disclosure resolutions. Until now, ISS had followed a "case-by-case" approach on whether to recommend voting for these proposals. For the upcoming proxy season, however, ISS has changed its policy to a general recommendation of voting in favor of these proposals. In another unfortunate decision that suggests ISS is shifting from advisor to activist, the organization joined the Center for Political Accountability and Walden Asset Management — two leaders in the disclosure movement — in a Webinar on the subject last week.
This change of policy may be convenient for ISS but it ignores the realities of corporate governance. Even a cursory review of the proposals submitted last year reveals that they were far from uniform. Some proposed that the independent directors initiate a comprehensive review of corporate political spending, others sought annual disclosure of all political giving, while still others resolved that disclosures should be made by newspaper publication.
Clearly, all of these proposals were not cut from the same cloth. Why, then, should ISS adopt a policy that treats them as if they were? The differences among these proposals counsels for a case-by-case approach, and not just by ISS. Corporate boards should support positions based on the overall impact on their companies, and not simply apply a uniform "thumbs up" or "thumbs down" rule to all spending disclosure proposals.
Last year, The Conference Board, a global, independent business membership and research association, formed a committee to engage and educate the business community on the topic of corporate political spending. While noting that its members did not agree on every question with respect to political spending, the committee found that it agreed on one issue "that a check-the-box, one size that fits all approach will not work."
ISS' decision to recommend that voting for political spending disclosure proposals ignores the fact that there may be very good reasons for voting against some proposals. A proposal may, for example, impose unacceptable costs on the company. Worse, it may require unwarranted invasions of personal privacy, such as by requiring that the corporation name those involved in making political spending decisions. Of course, it is also possible that other proposals will deserve the support of the Board.
ISS' new approach also ignores the source of the vast majority of these proposals. According to James R. Copland of the Manhattan Institute, 92% of all political spending resolutions submitted to the nation's largest companies between 2008 and 2011 were sponsored by funds affiliated with labor unions or social and religious institutions. Thus, the groups pushing these proposals are likely to have agendas that may not be shared with other stockholders and that are focused on issues other than investment return.
ISS says that it changed its policy because of a perceived demand for greater transparency. The actual voting results show otherwise. The reality is that to date most stockholders haven't supported proposals related to political spending. The Manhattan Institute has reported that among the 97 stockholder resolutions related to political spending submitted to the country's largest 15 public companies in the last four years, not one came close to achieving majority support.
Those advocating these resolutions cite significant interest in the issue, noting that support averaged 33 percent last year. Of course, this means that more than 2/3 of the shareholders on average did not support those proposals! In essence, the proponents are saying "we have such a good idea that we are willing to let the overwhelming majority of those who don't support it pay for it".
And even if there is a desire for more transparency, it wouldn’t mean that all stockholders want the same disclosure in the same way. For example, most people like ice cream but they don't all like the same flavor served in the same way. Nor is everyone willing to pay the same price for a cone or a cup.
It is clear that many are unhappy with the Supreme Court's decision in Citizens United holding that the government may not prohibit either unions or corporations from spending money to support or denounce individual candidates in elections. In response, they are enlisting corporate proxy statements and other stockholders' money in a campaign to limit political speech by corporations.
Rather than perform the hard work of individual analysis, ISS has elected to offer all of their clients a one-size-fits-all solution. This is neither good advice nor good policy. Stockholders don't live in a one-size-fits-all world and neither should ISS and its clients.
