A hard-fought campaign is over and President Obama has been reelected. Should shareholders take notice? In brief, yes. In the paper, Corporate campaign contributions and abnormal stock returns after presidential elections, forthcoming in Public Choice, we explore the stock market performance of top corporate contributors after the elections that brought Bill Clinton and George W. Bush, respectively, to power. In both cases, the top contributors strongly outperformed the market.

We focus on campaign contributions by corporations before a presidential election and their stock market performance afterwards. From a rent-seeking perspective, companies can have an incentive to spend money for presidential candidates. And, as presidential hopefuls need to raise large sums, campaign contributions by companies and business associations are usually a welcome source of funds. After the 2010 Supreme Court ruling in Citizens United against FEC, which grants companies the same free speech rights (and thus spending in the political process) as those accorded to individuals, corporate campaign contributions are likely to become even more important in the future.

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The UAW Retiree Medical Benefits Trust (Trust) and leading drugstore chain Walgreen Co. (Walgreens) recently announced an agreement to a multi-year collaboration in which the company would develop a best practice policy approach to corporate political spending and lobbying activities. A product of constructive dialogue between the Trust and Walgreens, the agreement highlights the utility of the shareholder engagement process by underscoring that companies and shareholders can work together to their collective long-term interest.

Walgreens is to be applauded for coming to the table and developing an agreement to work together with the Trust.

The main components of the agreement are:

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Corporate America’s “proxy season” has now wrapped up: most of America’s large publicly traded companies hold annual meetings to vote on business, including shareholder proposals, between April 15 and the end of June. Among the 250 largest U.S. public companies by revenues that constitute the Manhattan Institute’s Proxy Monitor database, 214 had held meetings by July 1.

In 2013, companies faced more shareholder proposals, on average, than in 2012, but the average support for proposals fell and a smaller percentage of proposals received the support of a majority of shareholders. The most commonly introduced type of proposal, as in 2012, involved companies’ political spending or lobbying; but as in 2012, none of these proposals passed, and shareholder support for this class of proposals held steady at a modest 18 percent.

This post discusses these results in more detail. First, the post summarizes 2013 shareholder proposals, including their rate of introduction and a breakdown of shareholder proposal types and shareholder proposal sponsorship. Next, the post examines voting results. Finally, the post looks in more depth at the most common class of proposal: that involving political spending or lobbying.

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Institutional Shareholder Services Inc. (ISS) recently published its 2014 Corporate Governance Policy Updates, which would apply to annual meetings beginning in February 2014. ISS updated relatively few of its policies this year, but the changes largely represent a more measured, company-specific approach to corporate governance practices, which reflects a move by ISS to avoid “one-size-fits-all” policies and recommendations. ISS also announced a new consultation and comment period concerning potential policy changes applicable to the 2015 proxy season or beyond with respect to director tenure, director independence, independent chair shareholder proposals, equity-based compensation plans and auditor ratification.

2014 Policy Updates

Board Response to Majority Supported Shareholder Proposals. As announced last year, ISS evaluates a company’s response to shareholder proposals that receive a majority of shares cast in considering “withhold” recommendations against the full board, committee members or individual directors. With respect to such majority supported shareholder proposals, ISS will now make vote recommendations on director elections on a case-by-case basis and will no longer require boards to fully implement majority supported shareholder proposals in all cases. Instead, ISS will consider mitigating factors in cases involving less than full implementation, including the board’s articulated rationale for its response and level of implementation (with consideration of such rationales being a new factor not previously considered by ISS), disclosed shareholder outreach efforts by the board in the wake of the vote, the level of support and opposition for the proposal, actions taken, and the continuation of the underlying issue as a voting item on the ballot (as either shareholder or management proposals).

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On November 21, 2013, Institutional Shareholder Services Inc. (ISS) released updates to its proxy voting policies for the 2014 proxy season, effective for meetings held on or after February 1, 2014. [1] In addition, ISS has requested that companies notify it by December 9, 2013 of any changes to a company’s self-selected peer companies for purposes of benchmarking CEO compensation for the 2013 fiscal year.

This post provides guidance to US companies on how to address ISS policy changes and also highlights recent developments regarding potential regulation or self-regulation of proxy advisory firms.

The amendments to ISS proxy voting policies for the 2014 proxy season relate to:

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Mutual funds’ support for corporate political disclosure reached a new high in 2013, according to a ten-year analysis by the Center for Political Accountability. Forty large US mutual fund families voted in favor of corporate political spending disclosure an unprecedented 39% of the time, on average.

CPA’s review of mutual fund votes looks at how 40 of the largest U.S. fund families voted on 276 shareholder requests for disclosure of corporate political contributions at U.S. companies over proxy seasons from 2004 to 2013 (covering shareholder meetings from 1 July 2003 to 30 June 2013). Together, these fund families manage around $3.3 trillion in U.S. securities, according to Morningstar® fund data, and control a large portion of the shareholder vote in US securities.

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The SEC’s recent decision to take disclosure of political activities off the SEC’s agenda is a policy mistake, as it ignores the best research on the point, described below, and perpetuates a key loophole in the investor-relevant disclosure rules, allowing large companies to omit material information about the politically inflected risks they run with other people’s money. It is also a political mistake, as it repudiates the 600,000+ investors who have written to the SEC personally to ask it to adopt a rule requiring such disclosure, and will let entrenched business interests focus their lobbying solely on watering down regulation mandated under the Dodd-Frank Act and the 2012 securities law statute, rather than having also to work to influence a disclosure regime.

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In our paper, Corporate Distress and Lobbying: Evidence from the Stimulus Act, forthcoming in the Journal of Financial Economics, we contribute to the long literature on corporate behavior in distress, as well as to studies of the consequences of financial distress. Using the financial crisis in 2008 as a negative shock to nonfinancial firms’ financial conditions, we document a novel fact on the relation between firms’ financial health and their lobbying activities. We compare the lobbying activities of firms before and after the onset of the crisis and find that firms with weak financial health—as measured by their CDS spread—lobby more. This result is robust to controlling for such firm-specific variables as size, profitability, and market-to-book ratio, all the firm characteristics that remain unchanged during the short window before and during the passage of the stimulus act, sector-wide time trends, and the adoption of different time windows for comparison in the difference-in-differences framework.

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The financial crisis that began in 2007 prompted a tidal wave of thinking about financial regulation. One major theme that has been pursued by the Financial Crisis Inquiry Commission, journalists, and scholars—most recently in Other People’s Houses, by Jennifer Taub—is the question of what went wrong in the years or decades leading up the crisis. A second strand of research answers the question of what substantive regulations we should have; one important book in this genre is The Banker’s New Clothes, by Anat Admati and Martin Hellwig. But beyond the issue of what regulations are appropriate for today’s complex financial system, a third important area of inquiry is the political and administrative landscape in which financial regulations (whether statutes, rules, administrative guidances, or court opinions) are hammered out. After all, if it were somehow possible to design a perfect regulatory framework, it could only become effective by navigating through the complicated web of interests and incentives that encompasses the legislative and executive (and perhaps judicial) branches.

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This post provides an overview of shareholder proposals submitted to public companies during the 2014 proxy season, including statistics, notable decisions from the staff (the “Staff”) of the Securities and Exchange Commission (the “SEC”) on no-action requests and information about litigation regarding shareholder proposals.

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Over the past several years, judicial decisions involving Citizens United, McCutcheon and SpeechNow.org have lifted caps on total political contributions, and also expanded the number of avenues through and amounts which companies can lawfully contribute to political campaigns. Corporate donations can still be made to recipients like political action committees and third-party organizations (such as trade associations). Now, however, companies can also contribute directly to campaigns and to organizations that support candidates and political causes, including Section 501(c)(4) social welfare organizations.

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Despite the fact that corporations and interest groups spent about $30 billion lobbying policy makers over the last decade (Center for Responsive Politics, 2012), there is a lack of robust empirical evidence on whether firms’ lobbying expenditures create value for their shareholders. Moreover, while the public perception of the lobbying process is that it involves unethical behavior that may bias rather than inform politicians, this is difficult to show since unethical practices are not typically observable. In our recent ECGI working paper, The Corporate Value of (Corrupt) Lobbying, we identify events that exogenously affect the ability of firms to lobby, and find that firms that lobby more experience a significant decrease in market value around these events. Investigating the channels by which lobbying may add value, we find evidence suggesting that the value partly arises from potentially unethical arrangements between firms and politicians.

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Leo Strine, Chief Justice of the Delaware Supreme Court Review and a Senior Fellow of the Harvard Law School Program on Corporate Governance, and Nicholas Walter recently issued an essay with that is forthcoming in Cornell Law Review. The essay, titled Conservative Collision Course?: the Tension Between Conservative Corporate Law Theory and Citizens United, is available here.

The abstract of Chief Justice Strine’s and Walter’s essay summarizes it briefly as follows:

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Anyone paying the slightest amount of attention recognizes that the U.S. political system is performing poorly. Washington is gripped by extreme partisanship, which prevents Congress from conducting even routine business, and cooperation between the executive and legislative branches is near historic lows. But as I argue in my new book, Billionaires: Reflections on the Upper Crust, the problem with the nation’s politics is even deeper than the daily headlines suggest. There is limited transparency surrounding money and politics, and many institutions that in the past could counterbalance the power of the wealthy and other special interests have grown weak. It is difficult for financially strapped news organizations to provide quality coverage of government, and political parties have become heavily dependent on a relatively small number of wealthy and well-connected people for campaign contributions.

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Dozens of leading American corporations have embraced political transparency without the prodding of shareholder proposals. This is a new and important finding in the fourth annual CPA-Zicklin Index of Corporate Political Disclosure and Accountability released by the Center for Political Accountability on September 24.

At the same time, the Index found that companies that have already adopted disclosure and accountability continue to strengthen their policies, making them more robust and comprehensive. All this is happening in the face of intense opposition by several of the leading business trade associations.

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Despite recent setbacks, efforts by activist groups to pressure companies to disclose details of their political activities are not going away. As these groups become increasingly sophisticated, 2015 looks to be their most active year to date. In fact, for the first time ever, the Center for Political Accountability plans to issue a report this year ranking the political spending disclosure practices of all 500 companies in the S&P 500 Index. This post highlights recent developments regarding corporate political spending disclosure efforts, looks ahead to what public companies can expect in the near future, and provides strategies and tips for those grappling with disclosure issues.

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Citizens United has been the subject of a great deal of commentary, but one important aspect of the decision that has not been explored in detail is the historical basis for Justice Scalia’s claims in his concurring opinion that the majority holding is consistent with originalism. In this article, we engage in a deep inquiry into the historical understanding of the rights of the business corporation as of 1791 and 1868—two periods relevant to an originalist analysis of the First Amendment. Based on the historical record, Citizens United is far more original than originalist, and if the decision is to be justified, it has to be on jurisprudential grounds originalists traditionally disclaim as illegitimate. The article is available on SSRN at http://ssrn.com/abstract=2564708.

Citizens United v. FEC struck down McCain-Feingold’s restraints on electoral expenditures by corporations. In his concurring opinion, Justice Scalia argued that the decision could be justified through the originalist approach to constitutional interpretation. In particular, Justice Scalia asserted that there was “no evidence” that, at the time of the Founding, corporations were not subject to government regulation of their ability to spend money to advocate the election or defeat of political candidates.

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The United States and the United Kingdom are lumped put together as ‘dispersed shareholder’ jurisdictions and contrasted with the concentrated shareholdings found in the rest of the world. This paper, Shareholders in the United Kingdom, argues that it would be better to view the UK, at least over the past half century, as a semi-dispersed rather than as simply a dispersed shareholder jurisdiction, and that there are interesting contrasts between the UK and the US experience.

Whilst the typical company listed on the main market of the London Stock Exchange certainly lacks a single (or even a cohesive small group) of shareholders with legal control, neither does the typical company display atomised shareholdings, for example, where no single shareholder holds more than 1% of the voting rights. Typically, a coalition of six or so of the largest shareholders can put together enough votes to have a fighting chance of carrying a resolution at a shareholder meeting against the wishes of the management. The question thus becomes one of the incentives and disincentives for those shareholders to coordinate their actions.

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As we near the close of corporate America’s “proxy season”—the period between mid-April and mid-June when most large, publicly traded corporations in the United States hold annual meetings to vote on company business, including resolutions introduced by shareholders—a clear picture has begun to emerge. By May 27, 2015, 211 of the nation’s 250 largest companies by revenues, as listed by Fortune magazine and in the Manhattan Institute’s ProxyMonitor.org database, had filed proxy documents with the Securities and Exchange Commission. This post bases its analysis on those companies’ filings, as well as voting results for 186 of those companies that had held their annual meetings by May 22.

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Last week, the House Appropriations Committee included in its 2016 appropriations bill for financial services agencies a provision that would prevent the SEC from developing rules that would require public companies to disclose their political spending. Although this provision is unlikely to become law, its adoption is regrettable. In our view, Congress should let the SEC do its job and use its expert judgment—free of political pressures in any direction—to determine what information should be disclosed to public-company investors.

In July 2011, we co-chaired a committee of ten corporate and securities law academics that petitioned the SEC to develop rules requiring public companies to disclose their political spending. The SEC has now received over 1.2 million comments on the proposal—more than any rulemaking petition in the SEC’s history. As we have explained in previous posts on the Forum, the case for rules requiring disclosure of corporate spending is compelling. Unfortunately, Chairman Mary Jo White has faced significant political pressure not to develop such rules, and the Commission has so far chosen to delay consideration of rules in this area.

As we explained in earlier posts on the Forum (see, for example, posts here and here), we view this delay as regrettable in light of the compelling arguments in favor of disclosure and the breadth of support that the petition has received. Furthermore, as we explain in detail in our article Shining Light on Corporate Political Spending, an analysis of the full range of objections that opponents of transparency have raised makes clear that these opponents have failed to provide a convincing basis for keeping corporate political spending below investors’ radar screen.

We agree with the bipartisan group of three former SEC Commissioners who just last month referred to the SEC’s inaction on the petition as “inexplicable.” At a minimum, the broad support and compelling arguments in favor of disclosure of corporate spending on politics make clear that the Commission should move promptly to consider the petition on the merits. Unfortunately, last week’s move by the Appropriations Committee reflects another attempt to avoid consideration of the rulemaking petition on its merits. Members of Congress should not try to prevent the SEC from even considering the substantive merits of the petition.

While corporate political spending is an issue that politicians are naturally interested in, our petition focuses on whether investors should receive information regarding political spending at the companies they own. That is an issue that falls squarely within the SEC’s mandate and expertise. Regardless of their views on corporate political spending, Congressmen of all stripes should avoid interfering with the Commission’s rulemaking processes. We urge them to allow the SEC to do its job.