SEC Strengthens Shareholders’ Role In Corporate Political Speech Decisions

The Supreme Court’s recent decision in Citizens United v. FEC makes clear that corporations have considerable freedom to spend corporate funds on elections. In an article published in the Harvard Law Review last November, Lucian Bebchuk and I argued that, in the wake of Citizens United, lawmakers should reconsider the corporate-law rules governing who decides how corporations use this freedom. Specifically, we argued that these rules should give shareholders a greater role in corporate political speech decisions. Recently, the Securities Exchange Commission provided important guidance that will strengthen shareholders’ role in deciding whether and how corporations spend on elections.

Under existing corporate-law rules, corporate political speech decisions are subject to the same rules as ordinary business decisions. Thus, political speech decisions can generally be made without input from shareholders, a role for independent directors, or detailed disclosure—the safeguards that corporate-law rules establish for special corporate decisions. In our article, we argued that the rules governing ordinary business decisions are inappropriate for corporate political speech, and proposed rules to strengthen the role of shareholders and independent directors, and mandate special disclosure, when directors and executives seek to spend corporate funds on elections.

Among the existing corporate-law rules governing who decides on corporate political speech is the Securities Exchange Commission’s Rule 14a-8, which allows shareholders to include proposals on the company’s proxy ballot for a vote by shareholders. Rule 14a-8 includes an exception for proposals related to ordinary business operations, providing that companies can exclude such proposals from the corporate ballot. The SEC staff has previously concluded that this exception applies to shareholder proposals related to corporate political spending. For example, as we noted in our article, the staff has permitted companies to exclude shareholder proposals recommending that a corporate political action committee be disbanded, and proposals requesting that the company provide shareholders with a report on lobbying activities.

This proxy season, a Home Depot shareholder, NorthStar Asset Management, asked the company to include on its ballot a proposal recommending, among other things, that the board disclose its policies on electioneering contributions—and give shareholders an advisory vote on those policies. Home Depot sought permission from the SEC to exclude the proposal from its ballot, arguing that the proposal related to Home Depot’s ordinary business operations. In a letter opposing Home Depot’s request, and citing our article, NorthStar argued that Rule 14a-8 required the proposal to be included.

In March, the staff agreed with NorthStar, concluding that the proposal could not be excluded on the ground that it related to Home Depot’s ordinary business operations. Home Depot’s proxy statement, filed two weeks later, now includes the proposal on the ballot—along with management’s statement opposing the proposal.

The SEC’s decision strengthens shareholders’ voice in corporate political speech decisions. By requiring companies to include proposals like NorthStar’s on the ballot, the SEC will allow shareholders, for the first time, to express their views on corporate spending on politics to directors and executives. We should expect that the decision will help bring corporate political speech decisions into line with the interests of shareholders.

To be sure, under current corporate-law rules shareholders’ role in this area remains far too limited. For example, NorthStar’s proposal, consistent with Delaware law, merely recommends that the board disclose its policies on political spending and give shareholders a say on those policies. Even if shareholders overwhelmingly vote for NorthStar’s proposal, Home Depot will not be bound to follow it.

To the extent that the interests of directors and executives in corporate spending on politics diverge from those of shareholders, corporate-law rules should give shareholders meaningful authority with respect to those decisions. That is why, in our article, we proposed that shareholders be given authority to veto corporate budgets for political spending and to adopt binding resolutions governing the targets of such spending. Providing shareholders with this power will make it more likely that corporate spending on elections, and the recipients of that spending, are consistent with shareholder interests.

As long as corporations have the freedom to engage in political spending, we will need rules to govern who decides whether and how corporations will use that freedom. The SEC’s approach to NorthStar’s proposal makes it more likely that shareholders will have a role in those decisions. Lawmakers should continue to reexamine the corporate governance rules addressing political speech decisions, acknowledging—as the SEC has—that these decisions are substantially different from, and should not be subject to the same rules as, ordinary business decisions.