Companies face new pressure from shareholders and regulators to disclose policies and political contributions | Skadden, Arps, Slate, Meagher & Flom LLP

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  • Activist shareholders are increasing pressure on companies to disclose their political spending and their lobbying and trade association activities.
  • In 2021, a record 40% of shareholder proposals regarding corporate political activities were adopted, a year after a previous record was set at 20%.
  • The SEC is considering new ESG reporting requirements that may require more disclosures.

Corporate political activities are increasingly subject to scrutiny for environmental, social and governance (ESG) reasons. Demands that companies and their political action committees (PACs) justify their contributions based on candidate votes on ESG issues came to the fore with North Carolina’s 2016 gender-responsive toilet bill. This evolved into a more general focus on LGBTQ+ and other ESG issues. , such as diversity and climate change, and culminated with the events at the United States Capitol on January 6, 2021. This has led many companies to reevaluate their political donation programs. Some have temporarily suspended all political donations, while others have suspended contributions to the 147 members of Congress who voted against certification of the 2020 presidential election results.

Many companies that suspended all or part of corporate and PAC contributions following Jan. 6 are stepping out of their self-imposed bans and actively contributing again. There has also been an increase in the number and intensity of activist shareholder demands for disclosure of political spending, lobbying and trade association activities. Along with political donations, companies are also being asked to weigh in on changes to state voting law across the country.

Shareholder policy proposals gain popularity

Meanwhile, during the 2021 proxy season, shareholder proposals seeking disclosure of corporate political spending passed at the fastest pace on record. Although some shareholders have been pushing for increased disclosure of corporate political spending for nearly two decades, their proposals have rarely won majority support until recently. (See “The landscape of activism continues to evolve.”)

In 2020, a record 20% of these shareholder policy proposals were adopted, a number eclipsed in 2021 with a new high of 40%, according to Bloomberg Law. In addition to requesting disclosure of the contributions themselves, many of these proposals request disclosure of company policies for making contributions, as well as the titles of those involved in the decision-making.

In making these demands, supporters often point to the aftermath of Jan. 6, as well as the intense polarization of the 2020 election, hoping to build support for their measures given the public scrutiny of corporate actions. in response to these events. In some ways, the effect was similar to the Supreme Court decision United Citizens decision in 2010, which also led to a significant increase in shareholder support for political disclosure proposals, as the Court struck down the ban on independent corporate spending, allowing unlimited independent corporate political spending. But the 2021 campaigners started from a much higher base of support.

The impact of the political disclosure movement goes beyond the companies that faced shareholder proposals. According to a recent study by the Center for Political Accountability, 370 S&P 500 companies now disclose some or all of their political spending, or prohibit at least one type, up from 332 companies in 2020.

The 2021 proxy season also saw an extension in the scope of proposals. Increasingly, the proposals ask not just for disclosure, but also for substantial restrictions on the company, such as prohibiting contributions to candidates who voted for certain anti-ESG bills or asking the company to provide metrics on how it assesses ESG issues when making contributions or working with trade associations.

Companies that have lost a proxy vote this year or fear losing a vote in the future are reassessing their political activity practices and disclosures. There is a trend towards increased oversight of political activity by the board and memorization of guidelines for corporate political spending. Companies vary in their approaches to disclosure, balancing the transparency some shareholders seek with the administrative burden of compiling reports and the need to conduct government business initiatives.

The SEC can compel disclosures

In 2021, the Securities and Exchange Commission (SEC) considered updating reporting requirements and improving its standards requiring publicly traded companies to report on ESG issues. (See our April 30, 2021 Client Alert “SEC Primed To Act on ESG Disclosure.”) Gary Gensler, the new SEC Chairman, has publicly indicated that the SEC plans to propose mandatory climate risk disclosure rules by the end of the year.

Currently, disclosure of ESG issues to shareholders is only required if they are considered material, and there is no guidance as to whether political spending is considered a material ESG factor. However, on March 15, 2021, Acting SEC Chair Allison Herren Lee called on the public to participate in the development of new ESG disclosure requirements, calling them “inextricably linked” to political spending by companies. businesses. Additionally, Chairman Gensler said during his confirmation hearing on March 2, 2021 that he would consider implementing a shareholder political spending disclosure rule.

Most recently, on November 3, 2021, the SEC announced changes to its no-action letter policy regarding the exclusion of shareholder proposals, making it more difficult for companies to rescind proposals on ESG issues. . In particular, the SEC said it would give less credence to corporate arguments that shareholder proposals focused on social policy issues should be barred because they interfere with the “ordinary business” operations of a corporation. business. This decision highlights the SEC’s continued emphasis on ESG reporting. (See our November 5, 2021 Client Alert “SEC Staff Issues New Guidance on Shareholder Proposals, Rescinding 2017-2019 Guidance.”)

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