The 2023 proxy season is underway for public companies and their investors. Corporate secretaries, attorneys, and executives actively participate in the SEC’s shareholder proposal process. Consistent with recent proxy seasons, a significant number of companies are receiving proposals calling for new or improved policy disclosures. While these proposals have been around for some time, recent contentious election cycles, hot-button debates, including the 2022 Supreme Court decision in Dobbs v. Jackson Women’s Health Organization, and increased investor attention to ESG issues (as well as criticism of such a focus) have placed increasing emphasis on disclosure of corporate political spending.
It is essential to respond effectively to shareholder proposals on this issue. Although shareholder proposals are not binding, proposals that are approved – or that fail but with a substantial level of support – will give rise to the expectation that the company will address the subject of the proposal within months of the annual meeting. A company’s failure to act on a shareholder proposal that is approved or receives strong support can damage the company’s reputation and could signal to shareholders and proxy advisory firms that the board is not is not receptive to an issue of concern to shareholders. This may give rise to further shareholder proposals and potential votes against some or all of the company’s directors at the next annual meeting. In certain circumstances, failure to respond effectively to a shareholder proposal could lead activist investors to threaten or initiate a proxy fight before the next annual meeting.
In recent years, shareholders have submitted hundreds of proposals to encourage companies to voluntarily disclose more information on their websites regarding their spending and political processes. In Covington’s 2015 guide to “Responding to Corporate Political Disclosure Initiatives,” we noted that “although some have argued that these efforts are primarily aimed at forcing companies to reduce lobbying and political activity – not to promote transparency – they continue unabated.” The pace and scope of these proposals increased in the years that followed, with a significant number of shareholder proposals focusing on two topics: political contributions and lobbying expenses. According to the Center for Political Accountability (“CPA”), its political disclosure resolution model was used 22 times each during the 2021 and 2022 proxy seasons, resulting in six votes over 50% in 2021 and two in 2022. We expect, and have begun to see, a similar number of politically driven shareholder proposals this proxy season. Since December 2022, for example, CPA reported that its shareholder partners “filed 25 proposals during the 2023 proxy season, with more expected over the coming months.”
Proposals for shareholder policy disclosure take different forms. As noted, shareholders routinely submit proposals based on the “Model Resolution Information Package” issued by the CPA. The model resolution, among other things, asks companies to disclose political contributions, dues and other payments made to trade associations, as well as contributions to nonprofit social welfare organizations operating under Section 501(c) (4) of the Tax Code. Although shareholder proposals based on the model resolution continue to proliferate, the CPA reported that “average overall shareholder support for the resolution of the CPA model fell to 33.9%” in the 2022 proxy season, from “48.1% in 2021”.
Other proposals for corporate political disclosure focus on whether a company’s political activities align with its expressed corporate values. The Institute for Sustainable Investments 2022 Proxy Overview The report, for example, states that “while still primarily focused on governance and disclosure, (these proposals) increasingly challenge sources of corporate-related financial support”, including climate issues, civil rights and access to health care. In addition, a number of proposals for the current proxy season call on corporations to obtain reports from trade associations and other groups engaged in political activity regarding their use of corporate donations and in turn to publish these information on the public company’s website.
We also saw increased attention to shareholder proposals requiring disclosure of corporate lobbying activities, with some proposals specifically addressing climate-related lobbying. These proposals typically request an annual report disclosing the company’s direct and local lobbying policies and procedures, payments used for direct or indirect lobbying or local advocacy, and information about the company’s membership in organizations. that draft model legislation related to climate or environmental issues.
When evaluating corporate political disclosure and lobbying proposals, companies should keep the following considerations in mind:
Set the table
Some public companies have successfully avoided political disclosure proposals by taking steps to increase their scores on the CPA-Zicklin index. The CPA-Zicklin Index rates public companies on a 70-point matrix based on information disclosed on the company’s website regarding the company’s political activities. Last year, for the first time, CPA-Zicklin class all companies in the Russell 1000. In the past, lower-tier companies have been disproportionate targets of shareholder proposals. To reduce the risk of receiving shareholder proposals in the first place, companies can assess their website’s voluntary policy disclosures to identify ways to increase their scores. Some CPA-Zicklin factors may represent “low hanging fruit” for companies, such as disclosing information about already public contributions to candidates, Section 527 political organizations, and ballot measurement committees, as well as with respect to the company’s existing practices for political oversight. expenses. Although no similar ranking system exists for disclosure of corporate lobbying activities, some public companies also voluntarily disclose public information on their websites regarding lobbying activities, such as links to federal lobbying reports. and relevant states.
Consider potential recommendations from the ISS
In November 2022, the prominent proxy advisory firm Institutional Shareholder Services (“ISS”) published for the first time a policy on proposals governing political spending and lobbying “congruence,” as summarized in this Covington alert. The policy recommends a “case-by-case vote” on such proposals, taking into account company policies and existing disclosures, “any identified incongruence between a company’s direct and indirect political expenditures and its stated values and priorities. publicly,” and “recent material controversies related to direct and indirect lobbying, political contributions, or political activities of the Company.” Companies that have been accused of such incongruities or have been party to such controversies should be particularly prepared for shareholder proposals on this subject.
Beware of aggressive requests
For some companies, it may be tempting to respond to a shareholder proposal by simply acceding to the demands of the activist. But some requests can impose significant burdens on the company. For example, many activists seek information about corporate donations to 501(c)(4) welfare organizations. But these contributions are generally not required to be made public by applicable laws, and companies may have valid economic reasons to keep these expenditures private, including protecting themselves from competitor problems in the areas in which they are engaged in policy advocacy. Even more ambitious, the CPA’s “Model Code of Conduct for Corporate Political Spending” (the “Model Code”) calls on companies to “require reporting from trade associations or other third-party groups receiving of the company on how it is used. and the candidates the expenses promote. This corresponds to a factor on the CPA-Zicklin Index which asks if the company discloses the amounts and recipients of payments “made by trade associations or other tax-exempt organizations of which the company is either a member or a donor.” In other words, this factor requires companies to report not only the names of recipients of company funds, but also to report how outside trade associations and tax-exempt organizations spend their own money. According to the 2022 CPA-Zicklin Index, among companies that allow at least some political spending, only about 5% receive full credit for this factor. Requiring trade associations to provide these reports for public consumption may cause trade associations to deny the company’s application for membership, interfering with the company’s business objectives.
Companies also have the possibility of negotiating with the proposer in order to obtain the withdrawal of the shareholder proposal. If there are elements of a proposal that a company does not believe it can accommodate, a sponsor might be willing to withdraw the proposal in exchange for additional information regarding the company’s political activities and the role of the board. of Directors in supervising these activities, as well as additional information disclosure on other matters.
Companies can also respond to potential concerns about political spending by providing information about the current involvement of the board of directors, or a committee of the board, in overseeing the company’s political spending and lobbying activities. . Some company policies, for example, provide that the board or an independent committee of the board will review company policies regarding political activities and receive regular reports from management regarding corporate political spending. Disclosures demonstrating active board engagement and outlining a company’s existing policies and practices can mitigate the impact of a shareholder proposal. In addition to improving a company’s negotiating position with the sponsor, improved disclosure can provide a basis for making a case that a proposal can be excluded from the company’s proxy documents as having been substantially implemented and reduce the level of support for proposals that are included in these documents. .
This message comes to us from Covington & Burling LLP. It is based on the company’s memorandum, “Tips for Responding To Corporate Political Disclosure Shareholder Proposals”, dated February 16, 2023, and available here.