With almost all of the results from the 2006 proxy season in, it is clear that some shareholders have their eyes on another season: the coming November elections.
Indeed, the number and sophistication of shareholder resolutions related to corporate political contributions continues to rise. “The goal is to get companies to agree to disclose and require board oversight of their political spending,” says Bruce Freed, co-director of Washington, D.C.-based Center for Political Accountability, which researches corporate campaign contributions and helps shareholder organizations file proposals with corporate boards.
The center, along with 17 institutional investor partners that include large public pension funds, files resolutions at companies to force management to disclose and account for “soft money” spending. Companies have been banned from making “hard money” donations — that is, money given directly to a particular candidate — since the Watergate era. Soft money, by contrast, consists of contributions to political parties or other political organizations.
During the 2006 proxy season, the Center for Political Accountability and its partners went beyond simply asking for disclosure of soft money amounts and filed resolutions urging the disclosure of corporate payments to trade associations that are used for political purposes. The reason: the increasing political activism and spending by trade associations since the passage of the Bipartisan Campaign Reform Act of 2002, also known as the McCain-Feingold bill, after its main Senator sponsors John McCain (Rep., Ariz.) and Russ Feingold (Dem., Wisc.).
The McCain-Feingold bill banned corporations from giving soft money to national political party committees. “McCain-Feingold 2002 was enacted to limit corporate contributions, but rather than limiting them, it has made some aspects of them more difficult to track,” notes Jim Letsky, senior analyst at Institutional Shareholder Services. An unintended consequence of the law banning corporate giving to political parties is that companies have increasingly been giving soft money contributions to 527s — political organizations whose name is derived from their Internal Revenue Service code.
Though prohibited from openly campaigning for a particular candidate (doing so would bring them under the purview of the Federal Election Commission), 527s typically support certain candidates via thinly veiled, issue-specific advertising. Such groups played a prominent role in the 2004 U.S. presidential election, with the liberal group MoveOn.org and the conservative group Progress for America drumming up millions in fundraising for that election.
Because 527s are not regulated by the FEC, they also have looser reporting requirements than political action committees (PACs) or other avenues for corporate contributions. Donors to 527 groups need not disclose their contributions, rather, each 527 reports the funds it receives to the IRS. As a result, calculating one company’s total contributions to 527s would be a challenge. “It’s like looking for a needle in a haystack,” said Freed. “You would need to go through every 527 filing to see what the company gave.”
That has shareholders demanding more insight into how companies spend their political dollars. So far this year, 36 shareholder resolutions seeking greater transparency on political contributions were presented for votes and the average support stands at 20 percent, according to ISS’s Letsky. That compares with last year, which witnessed 27 resolutions with an average support of 9.7 percent. Such resolutions first emerged on the ballot in 2003, when two resolutions received an average support of 6.6 percent.
There will be more to come in 2007, according to Freed. “We are seeking to engage a much larger number of companies [next year],” he said, noting that shareholder groups will file resolutions if they cannot come to an agreement with companies through discussions.