Show Me the Money: Navigating the New Transparency Requirements For Corporate Political Contributions
It has been about two weeks since the riot at the Capitol Building in Washington, D.C. captured news headlines around the world. While the aftermath and consequences of the events that took place in the nation’s capital are largely still to be determined, many corporations have already begun to respond.
Mega-players including Facebook, Microsoft, AT&T, Morgan Stanley, JP Morgan, Marriott, and Coca-Cola have released statements on this issue over the past two weeks that mostly fall in one of these general buckets:
- Suspending all contributions for a set period of time (i.e. JP Morgan – 6 months)
- Suspending all contributions for an indefinite amount of time (i.e. Facebook – at least 6 months)
- Suspending contributions only to certain public officials (i.e. AT&T)
- Acknowledging the events that transpired and stating they will be factored into the decision process (i.e. Delta Air Lines)
With the first batch of companies already changing or suspending their policies, the public’s focus may now shift to their peers. Added pressure from employees and the public to make a statement on future political contributions is in the realm of possibilities. However, what may be of most interest to board members and corporations going into the 2021 proxy season is how shareholders react to these company announcements. Will there be added pressure from investors on companies to disclose these contributions?
The truth is that even before the events that have transpired over the past two weeks, investors have been increasingly more in favor of corporations disclosing their political contributions.
What Exactly Defines a Political Contribution?
There are a variety of ways how corporations can make political contributions, each of which has different regulations. A short summary of these is provided below:
- Traditional Political Spending: Often also deemed as “hard money”. Contribution limits apply to these, and the donors must be disclosed. Examples of these groups are candidate committees, political parties, and a traditional political action committee (PAC).
- Outside or Independent Spending: Also considered “soft money”, these contributions are made to efforts other than the candidate campaign. There are no contribution limits here. Funds can be used for a variety of purposes but cannot coordinate spending with the political parties or candidates. Some groups (i.e. Super PACs) are required to disclose their donors, but others are not. Groups not required to disclose are often considered “dark money” groups.
- Political Nonprofits: These are a variety of 501(c) organizations with slightly different structures or purposes. All must have a primary purpose outside of influencing elections. These groups may operate for religious, charitable, educational, social welfare, labor, agricultural, trade associations, or other purposes. They are not required to disclose donors, though some disclose voluntarily. A few examples of these 501(c) organizations include NAACP, AFL-CIO, NRA, Planned Parenthood, U.S. Chamber of Commerce, and National Association of Realters.
Support for All Political Activity Shareholder Proposals
While social shareholder proposals tend to be rare and vary by topic each year, proposals on political activity are the exception to that rule. In each of the past seven years, there has been a minimum of sixty shareholder proposals on political activity that have reached a vote. This is in addition to proposals that were filed by shareholders but later withdrawn.
It is clear that shareholders are increasingly in favor of their portfolio companies disclosing political contributions and policies on these contributions. The graph below shows a box-and-whisker plot of support levels on these proposals for each year since 2016. Each of the 25th, 50th, and 75th percentiles of support on these types of proposals has seen a sizeable increase over the past 5 years.
While the above trend is clear and shows shareholders’ appetite towards these proposals steadily growing, there is evidence that investors are even more in favor of these disclosures than the graph would suggest.
The “Usual” Political Activity Shareholder Proposal and Its Support Levels
The specific clauses of a shareholder proposal and the supporting statement are decided by the filer, so it is possible to see a variety of closely related proposals with marginal differences. This holds true for most types of shareholder proposals, including political activity proposals. However, the Center for Political Accountability (CPA) provides a standard “CPA model resolution” which many shareholder filers of political activity proposals choose to either follow entirely or leverage partially. These proposals request companies to report and semiannually update:
“1. Policies and procedures for making, with corporate funds or assets, contributions and expenditures (direct or indirect) to (a) participate or intervene in any political campaign on behalf of (or in opposition to) any candidate for public office, or (b) influence the general public, or any segment thereof, with respect to an election or referendum.
2. Monetary and non-monetary contributions and expenditures (direct and indirect) used in the manner described in section 1 above, including:
- The identity of the recipient as well as the amount paid to each; and
- The title(s) of the person(s) in the Company responsible for decision-making”
CPA conducted an analysis of only proposals that followed CPA’s model resolution layout. They found that average support rose from 36.4% in 2019 to 41.9% in 2020.
How Large Investors View These Proposals
Even more interesting is the CPA’s analysis of the 69 largest investors’ votes on these proposals over the past three years. Out of these investors, the support on corporate political disclosure resolutions rose from 67.3% in 2019 to 75.6% in 2020. No matter how this topic is approached, the general trend is clear: shareholders are increasingly expecting political disclosure and accountability from boards.
While on the topic of the largest investors, let’s take a glance at a few large institutional investors’ approaches on political contribution shareholder proposals. After acknowledging increased support for these proposals, the following may come as a slight surprise:
- Blackrock: CPA’s analysis of its model resolution over the past 3 years (only for meetings in the first half of each year) indicated Blackrock has not supported a single proposal. However, Blackrock supported the proposal at Cintas Corporation in the second half of 2020, and has announced in its 2021 Stewardship Expectations document that it will “seek confirmation from companies, through engagement or disclosure, that their corporate political activities are consistent with their public statements on material and strategic policy issues.” Blackrock will also expect companies to monitor any position a trade association takes that the company is a member of.
- Vanguard: Like Blackrock, Vanguard has also not supported a CPA model resolution during the first half of the past 3 calendar years. Moreover, Vanguard has not supported any shareholder proposal on political activity over the past 5 years. Vanguard has publicly announced that the investment advisor has paused political contributions but has not announced a change to its stewardship policy at this time.
- State Street: State Street supported 45.5% of CPA’s model resolution during the first half of 2019 and 2020. This seems to deviate from Blackrock’s and Vanguard’s past voting patterns but may lag other institutional investors.
Looking at three of the world’s largest institutional investors and their voting patterns on these political contribution proposals, it is remarkable to think that these proposals have managed to receive such high support despite a lack of support from Blackrock and Vanguard. However, the increased support levels over the past five years and a change in Blackrock’s stewardship policy are clear indicators that shareholders will continue to hone in on political contributions in 2021.
Current Landscape and Typical Management Pushback
The CPA has a scoring process in which each company’s political disclosure and accountability is analyzed through 24 indicators to be assigned a score of 0 – 100, with 0 being the weakest of the scores and 100 being the best practice. According to the CPA, 260 companies in the S&P 500 disclose some or all of their election-related spending, while 332 either disclose some spending or prohibit some election-related spending.
So, what about the rest of the S&P 500? Is there a downside to disclosing political contributions and having a policy for such contributions? When these proposals are filed, management’s push back often consists of some of the following points:
- Being in a highly regulated industry where elected officials can negatively impact the business.
- Political expenses being miniscule in comparison to overall expenses.
- Contributing to political action committees (PACs) and not direct contributions, most of which contributions are already publicly available.
- Being involved in a trade association for industry expertise, and the political actions of an independent trade association may not reflect positions the company has.
What Can We Expect in 2021?
Various publications have published pieces speculating that with the new administration in place, regulation may be considered to require increased and standardized disclosure about risks around political contributions. Whether that happens or not remains to be seen.
What we know for sure, however, is that corporations’ political contributions will be a topic at the forefront of shareholders’ minds in 2021. Annually for the past nine years, there has consistently been a large number of shareholder proposals filed on the political activity of companies, making it the most popular topic of social proposals. The second most popular topic of social shareholder proposals tends to vary by year, based on topics that are fresh on the minds of society, or “hot topics”. Given the current political climate, the transition of power is arguably one of, if not, the “hottest” topic in the news; it is possible that this will spill over into the frequency of shareholder proposals and investor sentiment.
While it is obvious this will be a topic to watch this proxy season, the specifics of how this will play out at annual meetings is still unclear. Some possibilities include:
- An increase in disclosures by companies on their political activities
- An increase in company policies that prohibit political contributions
- An increase in the number and/or support level of political activity shareholder proposals
- Different, or more specific, political activity shareholder proposals
- Investors voting these proposals differently, or engaging with portfolio companies more frequently
How You Can Prepare
- Assess regulatory risks within your industry. Some industries are highly regulated and participating in trade associations may be essential to remain innovative within an industry. In these cases, clear disclosure should be considered, but a policy completely banning political contributions may not make sense.
- Analyze peers within your industry. This is related to the previous point, but it is important to know who your shareholders will be comparing you to and how you measure up against your peers.
- Assess how public current contributions are. A common management counterargument to political activity shareholder proposals is that shareholders can access contributions through other sources, like CQMoneyline for example. If some or all contributions are public already, consider what the added costs would be of disclosing this information directly instead.
- Clearly disclose current or changed policy. If you have an existing policy in place, or have recently changed your policy, make this abundantly clear to all stakeholders. Many corporations have publicly edited their policies in the past two weeks, and more could follow.
- Be prepared to discuss with your shareholders. How investors will address this issue at annual meetings remains to be seen, but having conducted the above analysis should provide as a solid starting point for conversations with shareholders.
If you’re interested in learning more about how Clermont Partners can help your company develop a policy on political contributions, or help you prepare to engage with shareholders on this topic, contacts us.
- 2020 CPA-Zicklin Index of Corporate Political Disclosure and Accountability
- BlackRock: Our 2021 Stewardship Expectations
- Dark Money Basics
- Large Investor Support for Corporate Political Disclosure Jumps in Election Year
- Center for Political Accountability: How Companies Spend
- Cooley PubCo: Proposals for political spending disclosure make headway this proxy season
- The Conference Board: Corporate Political Spending
- The New York Times: A Company Backs a Cause. It Funds a Politician Who Doesn’t. What Gives?
- Quartz: Which S&P 500 companies are changing their political donation policies?