The Magazine

The ‘Transparency’ Agenda

It’s a murky business.

May 13, 2013, Vol. 18, No. 33 • By MICHAEL WARREN
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Activist shareholders used to agitate for companies to rein in executive compensation or divest from apartheid-era South Africa. Their proposals rarely won the support of even a plurality of shareholders, but internal support was seldom the goal. Stirring up controversy—and headlines—could generate public pressure. To avoid PR headaches, companies sometimes acceded to the activists’ demands, even when majorities of shareholders were not won over. 

This is where Freed saw his chance. In recent years, CPA and its allies have used the proxy process aggressively to hassle corporate boards to adopt more sweeping disclosure of their political spending. According to As You Sow, an umbrella group for activist shareholders, at least 125 proposals related to political spending are expected in the 2013 proxy season, a figure that has more than doubled in three years. Most of those filing these proposals are either pension funds, like the New York State Common Retirement Fund and the California State Teachers’ Retirement System, or “socially responsible” investor groups.

One of these is Trillium Asset Management, which last year extracted a major concession from Boston-based financial firm State Street. After a Trillium-backed disclosure proposal received 44 percent shareholder support, State Street reversed course. “State Street made a number of significant improvements to its disclosures and policies, including prohibiting its trade organizations from using its membership dues for political contributions and activities .  .  . and agreeing to disclose its political contributions to 527s and tax-exempt organizations,” the Trillium press release trumpeted.

To an outsider, it might seem that shareholder interest in political disclosure is increasing. Freed and company foster this belief, arguing in their letter to Abercrombie, for instance, that proxy advisory firms ISS and Glass Lewis “recommend voting for proxy proposals” expanding political disclosure. (The AFL-CIO is one of ISS’s largest clients, and Glass Lewis is owned by a teachers’ union fund in Ontario, Canada.) And Freed claims that “the average vote for these resolutions has topped 30 percent in the past three proxy seasons.” But these activists are stacking the deck. The conservative Manhattan Institute discovered that Freed’s 30 percent figure discounts abstentions, which most corporate rules consider “no” votes on shareholder proposals. The actual shareholder vote for disclosure proposals, Manhattan says, was just 17 percent across Fortune 200 companies in 2012, a seven-year low. In an interview, Freed said the Manhattan Institute’s methodology is “deeply flawed” and that the SEC’s own formula discounts abstention votes.

But internal pressure from proxy proposals is just one part of Freed’s strategy; another is “peer pressure.” The letter to Abercrombie cites Aflac, Exelon, Merck, Microsoft, and Wells Fargo as companies with “sound political disclosure.” CPA has developed its own (rather inquisitorial) index of major companies’ disclosure policies in conjunction with the Zicklin Center for Business Ethics Research at the University of Pennsylvania’s Wharton school of business (where Freed serves on the advisory board). The index scores the top 200 companies of the S&P 500 across 25 indicators, for a maximum of 72 points. The 2012 index ranks pharmaceutical giant Merck first, with a score of 70. The most improved company from 2011 was Costco, with an impressive 61. Meanwhile, 18 companies scored zero points, including Berkshire Hathaway, T. Rowe Price, and Priceline.com. 

Freed’s letter to Abercrombie cites the CPA-Zicklin index as demonstrating that “political disclosure and accountability [is] becoming a mainstream corporate practice.” The fact is, no corporation with a brand to uphold wants to find itself out of the mainstream—or cited by any corporate watchdog. It’s worth noting that four companies—IBM, Colgate-Palmolive, Goldman Sachs, and Praxair—were left off the CPA-Zicklin index because they were wise enough to engage in no political spending. Freed says they were left off at the request of other companies so as not to “skew” the index. 

All of this is only the start. Two weeks ago, officials at the SEC announced they were considering a new rule to require all publicly traded companies to disclose their political spending. Consideration for the rule came after an overwhelming petition drive from Soros-funded groups like Common Cause, Public Citizen, and Citizens for Responsibility and Ethics in Washington. In the New York Times story on the announcement, Freed’s second-in-command and CPA’s counsel, Karl Sandstrom, gets the last word. 

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