Shareholder Proposal Settlements, the SEC, and Campaign Finance Disclosure

Reform of campaign finance disclosure has stalled in Congress and at various federal agencies, but it is steadily unfolding in a firm-by-firm program of private ordering. Today, much of what is publicly known about how individual public companies spend money to influence federal, state, and local elections—and particularly what is known about corporate “dark money”—comes from disclosures that conform to privately-negotiated contracts.

The primary mechanism for this new transparency is the settlement of the shareholder proposal, in which a shareholder trades its rights under SEC Rule 14a-8 for a privately-negotiated social policy commitment by corporate management. The shareholder proposal settlement has become increasingly popular as a tool for negotiating private rules for corporations on matters of environmental and social (E&S) policy. Investors submitted 474 shareholder proposals on E&S subjects in 2015, and 40 percent of these were withdrawn before they went to a shareholder vote, suggesting that, in a single year, nearly 200 were negotiated to a private agreement.

Corporate campaign finance disclosure stands at the vanguard of this trend. More than a hundred public companies have reached agreements with their shareholders in which the companies commit to campaign finance disclosure standards. In my new article, Shareholder Proposal Settlements and the Private Ordering of Public Elections, forthcoming in the Yale Law Journal, I analyze this emerging practice.

Above all, settlements of E&S shareholder proposals lack transparency: the process plays out completely behind closed doors, with no notice to or participation by most shareholders, other corporate stakeholders, or the public. The resulting agreements are not publicly filed and are rarely available to those other than the parties who negotiated them.

E&S proposals are typically initiated by institutional investors, and because these funds can obtain a reputational benefit from the announcement of a settlement, they are incentivized to settle. Likewise, because corporate managers may take a reputational hit when shareholders publish a proposal in the proxy, managers are incentivized to negotiate proposals away. The lack of transparency, the opportunism of participants, and the balance of power between shareholders and managers all shape the E&S reforms that are forged through the settlement process.

Private disclosure law is fragile. I found that companies have often failed to comply with settlement agreements on campaign finance disclosure. Enforcement of E&S proposal settlements suffers from several problems: a shareholder-proponent may be unwilling to undertake the costs of monitoring and enforcement after a deal is struck; federal securities regulation impedes enforcement; and changes in shareholding or corporate structure can effectively terminate a settlement without notice to the public. The fragility of proposal settlements suggests that the overall costs of maintaining a firm-by-firm program of private ordering may be greater than shareholder activists like to admit. It also makes it easy for firms to violate their commitments, and this tends both to reduce the value of the deals and to fuel mistrust between shareholders and managers.

Of course, the reform of campaign finance disclosure through private ordering invokes unique concerns that go beyond those raised by garden-variety E&S proposals. Campaign finance disclosure reform impacts electoral integrity and, ultimately, the legitimacy of our political process. Citizens United v. FEC, which removed corporate independent expenditures from substantive regulation by the state, shifted disclosure regulation closer to the core of the state’s remaining authority to regulate democratic elections. My article finds that, although standard setting through private mechanisms has generated some improvements upon public campaign finance disclosure law, it has mostly produced disclosure standards that are mutually-beneficial to the private actors who participated in the private standard setting. For example, the emerging trend in privately-negotiated campaign finance disclosure favors year-end reporting of electoral expenditures, months after November elections. The emerging standards defeat citizen interests in disclosure information and may serve to channel corporate electoral spending toward state and local elections.

For this article, settlement agreements themselves were reviewed and compared to companies’ public disclosures. Proposal settlements that set campaign finance disclosure standards comprise a body of private law. They come in different forms—some are exchanges of emails followed by a withdrawal letter, and others are multi-page contracts signed by both parties. Very few are publicly available. Ultimately, forty-two settlement agreements that set corporate campaign finance disclosure standards from 2009 to 2015 were obtained and reviewed; some public pension fund agreements were obtained through a request under New York’s Freedom of Information Law.

Lucian Bebchuk and Robert J. Jackson, Jr. have proposed an SEC political spending disclosure mandate. Opposition to the proposed rule is rooted in the idea that political spending disclosure falls outside the proper province of securities regulation and the SEC. In fact, however, the SEC’s existing rules already provide the governing framework within which the private ordering of corporate campaign finance disclosure is playing out.

The private disclosure regime has been heavily shaped by the legal framework of Rule 14a-8 and the SEC’s no action guidance. SEC rules determine who gets to participate in proposal settlements and who is excluded from the process. They determine what information must be disclosed about disclosure policy settlements, which in turn determines what voters know about companies’ “voluntary” disclosure commitments, and how stock market prices reflect information about individual companies’ spending practices. Existing SEC regulation has incentivized settlement of shareholder proposals, and has hobbled enforcement of the companies’ disclosure commitments. The result is increased agency costs, the loss of shareholder prerogatives, and suboptimal social policy reforms.

The article encourages a more nuanced discussion about the role of the SEC in governing private reform of corporate E&S policy, and particularly a more honest discussion about how SEC rules and policies have influenced what information about campaign finance is available to voters. It argues that corporate campaign finance disclosure presents a uniquely strong case for public law reform.

The full article is available for download here.