Corporate Freedom of Speech

Corporate Freedom of Speech

Published originally to NACD. Former SEC Commissioner Paul S. Atkins was no stranger to the agency when he was appointed by…


Published originally to NACD. Former SEC Commissioner Paul S. Atkins was no stranger to the agency when he was appointed by President George W. Bush in 2002, having served in the early 1990s under SEC Chairman Richard C. Breeden as chief of staff and Chairman Arthur Levitt as counselor. Atkins, whose experience spans decades in financial services and securities regulation, is currently chief executive of Patomak Global Partners, which provides consulting services on corporate and financial services industry matters. He also is non-executive chairman of the board of BATS Global Markets, an operator of leading securities exchanges in the U.S. and Europe. With 2012 marking the first presidential election since the U.S. Supreme Court’s Citizens United ruling and with demands from shareholder activists for additional disclosure on the rise, NACD Directorship asked Atkins to share his insights into the latest challenges facing directors and management.

What factors spurred political contribution-disclosure efforts, and what are the risks for public companies?

In the wake of the Citizens United decision, shareholder activists, including unions, state pension funds and “socially responsible investors,” have increasingly turned to shareholder proposals to selectively burden American businesses exercising their First Amendment rights. While disclosure of these non-material expenditures might seem harmless at first glance, the activists leading the charge have not been shy about their true intention, which is to inhibit free speech. For example, Media Matters for America [which bills itself as a “progressive research and information center”] says its goal is “to make the case that political spending is not within the fiduciary interest of publicly traded corporations and therefore should be limited.” Its tactic is to aggressively attack public companies for supporting policies with which it disagrees by providing information to “progressive partners” such as the AFL-CIO, SEIU, AFSCME and MoveOn.org, which then use that information out of context to tarnish the companies’ reputations. For instance, assume that a particular company contributes to a pro-business organization promoting corporate tax reform and that organization backs a candidate for elected office. Media Matters’ action network will portray that company’s financial support of the organization as an endorsement of the candidate and everything he or she has said or done—which is not the case. Far from protecting the company, the disclosure of its political activities will subject it to increased harassment from those with an opposing view.

Who are the targets of these “progressive partners”?

Media Matters’ network is aiming at various pro-business trade associations and other lobbying groups in Washington, and the companies that sup- port those associations.

Have individual directors been targeted?

Susan Bayh, an independent director who sits on the board of WellPoint—which contributes to various trade associations—was targeted with a just-vote-no campaign. It didn’t work—she got more than 90 percent of the vote—but it was meant as a message to individual directors that not disclosing certain corporate political expenditures could be hazardous not only to your company’s health but also to your personal reputation.

Activists are cherry-picking facts that might have a negative spin for a company even though there is no connection. Is it working?

When faced with pressure from activists, even large companies such as Coca-Cola and McDonald’s have backed down. One recent example is the pro-business American Legislative Exchange Council, which was targeted by activists because of its work with state legislatures on regulatory and tax reform. In the wake of the fatal shooting of Trayvon Martin, activists seized on ALEC’s work regarding voter identification and self-defense laws to create negative publicity for contributors, especially big retail companies. Maybe these sorts of companies are always going to be susceptible to this pressure because they’re afraid of boycotts in a business in which image is everything. Then there’s the Center for Political Accountability, which developed the Index of Corporate Political Accountability and Disclosure, which purports to rank companies on a scale of 0 to 100 on its subjective preferences regarding political transparency and accountability. Some of the most successful companies, such as Amazon and Wal-Mart, had a score of 0 in 2011. Other companies, such as Pfizer and Johnson & Johnson, last year were ranked at the top because they met the special-interest criteria. However, in 2012, Johnson & Johnson and Pfizer woke up to find that they had received a much lower score because the scale had changed; the rankers had changed the standards and found fault where these companies did not disclose 501(c)(4) contributions. This is another sign of how these activists move the goalposts to create the illusion that companies should disclose more. They work under the guise of “shareholders just want to know,” when, in fact, it’s not about shareholders at all; it’s purely about politics and removing the company and its interests from the debate. Unfortunately, it can be an effective way to coerce policy behavior, because some companies worry unnecessarily about a low ranking from this subjective index.

What should smart companies and their boards be doing?

As with anything, the best approach for corporate directors and management teams is clarity of purpose and tying your activities to building (including protecting) shareholder value. Companies should reach out to their shareholders to explain why they need to be engaged in advocacy efforts, including those done through trade associations. It is a dangerous world—if you are not vigilant about protecting your interests, you may get eaten before you know it.

Disclosure proponents are promoting their agenda under the banner of “more information is always better.” Are there times when disclosure can be detrimental?

Although the talking points of democracy—transparency, openness and disclosure—would seem to play well among shareholders, even the activists agree that disclosure isn’t really their goal. For example, Mike Dean, the director of Minnesota Common Cause, has stated, “We want to make the case that political spending is not good for business. You’re going to offend your customer base no matter who you give to.” Similarly, Bill de Blasio, of the Campaign for Accountability in Political Spending and a New York City may- oral candidate, has suggested that disclosure is just the stick to be used to browbeat companies. He said, “What happened to Target [which was attacked for contributing to a pro-business advocacy group] was child’s play compared to the strength that all of these organizations can bring to bear against companies that decide we’re going to go against the people’s will and involve themselves unduly in the political process.” I understand that shareholders’ first reaction to being asked, “Would you like to know how your company is spending your money?” might be “Sure, I’d like to know.” However, when specific details are highlighted in a way that creates a negative bias against the company, it may not be in the shareholders’ interest. We must remember that the amounts of these expenditures are rarely material to the company.

What does the SEC need in its next chairman?

Because she will inherit a commission that is split evenly along party lines, Elisse Walter has an opportunity to make virtue out of necessity by steering a different course from her predecessor. I am confident that she can do so by building on her good working relationships with her fellow commissioners of both parties….The issues that face the SEC should not be political. Walter should avoid the path taken by [Mary] Schapiro, who famously declared at the outset of her term that she was content to rely consistently on three-out-of-five votes to push the policy outcomes she wanted. Unfortunately, she did just that, with too many 3-2 votes on important rulemakings, including whistleblower, climate change disclosure, proxy access, consolidated audit trail, conflict minerals and short-sales rules. Some of these rules have been challenged in court and even struck down. The result: an agency with diminished credibility that is disturbingly politicized in rulemaking and enforcement. Walter has the opportunity to improve the SEC’s prioritization of its actions and to focus on rule-makings responsive to the causes of the financial crisis instead of trial lawyers’ and other political activists’ pet provisions, as well as on those that actually further the SEC’s mission.