The Re-Introduction of the Shareholder Protection Act

Several prominent members of the U.S. Senate and House of Representatives re-introduced yesterday the Shareholder Protection Act for debate. The bill would establish special corporate-governance rules for deciding when corporate resources may be spent on politics. Although it appears that the bill is unlikely to be adopted during this Congress, the approach it represents deserves consideration and support. In an article published last year in the Harvard Law Review, “Corporate Political Speech: Who Decides?,” we presented the case for such an approach. As we argued in “Corporate Political Speech,” political speech decisions are different from ordinary business decisions—and, thus, special rules are needed for deciding when a corporation may spend shareholder resources on politics.

The Shareholder Protection Act would establish a legal structure with three types of rules that apply when public companies wish to use corporate resources for political activity. These rules would require extensive disclosure, a role for independent directors, and shareholder approval.

First, the Shareholder Protection Act would require companies to disclose to shareholders each year both the amounts and recipients of the company’s spending on politics. Existing election law does not require disclosure of significant amounts of corporate spending on politics—especially contributions to intermediaries. Indeed, our article provided evidence indicating that five intermediaries who receive corporate contributions spent more than $130 million on lobbying and politics during the 2008 election cycle alone. Although the Act would mandate these disclosures by statute, the SEC currently has the authority to require disclosures of this type, and we urge the SEC to develop rules that would require that shareholders be given information on corporate political spending.

Second, the Act would require oversight of political spending by the board of directors. In our view, like other areas in which corporate law requires directors to take an active role in certain decisions—for instance, executive pay and financial audits—directors should be required to oversee corporate spending on politics. Because the interests of executives and shareholders may often diverge with respect to such spending, director oversight is especially desirable in this area. We also favor requiring directors to provide shareholders, in each year’s proxy statement, with a report explaining their choices and policies concerning the company’s spending on politics.

Third, the Act would require that shareholders vote to approve the amount of any corporate spending on politics. Our article argued in favor of giving shareholders a veto over such spending, noting that such a requirement would help reduce corporate political spending inconsistent with shareholder interests. As we pointed out, a similar rule has been in place for over a decade in the United Kingdom, which requires that shareholders consent to corporate spending on political speech that exceeds £5,000. Indeed, we would go further and give shareholders both a say on the overall level of spending and the power to adopt bylaws governing how this spending will be distributed. Giving shareholders a veto over the budget for political spending, without any say over the targets of that spending, may unnecessarily require shareholders to choose between having no spending at all or a budget spent, in part, in accordance with executives’ preferences rather than shareholders’.

As proposed, the bill would make all three of these rules mandatory for all public companies. As we argued in our article, however, it would be desirable instead to allow shareholders to opt out of rules giving directors and shareholders a role in corporate political spending decisions—so long as appropriate rules ensure that any opting out is consistent with shareholder interests. Giving shareholders the ability to opt out of these requirements should make lawmakers comfortable adopting strong default rules in this area; to the extent the burdens of these rules outweigh the benefits, directors should be expected to initiate, and shareholders to approve, opting out. To ensure that opting out is consistent with shareholder interests, however, the opt-out rule should include three features. First, shareholders should be free to opt out in both directions—for example, shareholders should be allowed to raise the majority of shareholders whose approval is needed for political spending, but also should be free to waive the requirement for approval altogether. Second, any opting out should require shareholder approval, and shareholders should have the power to initiate such a vote, so that directors do not have the power to opt out of these rules unilaterally. Finally, the rules should provide that any opting out will sunset after a specified period of time—say, five years. Such a provision would ensure that opting out continues to enjoy shareholder support.

Whether or not the bill becomes law during this Congress, we urge lawmakers to develop rules governing how corporations decide to spend—or not to spend—corporate resources on politics. As we noted in our paper, such rules are long overdue. Furthermore, by expanding the scope of constitutionally protected corporate political speech, the Supreme Court’s recent decision in Citizens United v. FEC makes the case for rules in this area even stronger. We hope that debates over the Shareholder Protection Act will highlight the importance of ensuring that corporate political spending is in line with shareholder interests and that our analysis will assist lawmakers as they consider and design rules that would serve this objective.