What Ted Olson Needs to Know About Corporate Democracy After Citizens United

Investors who disagree with the Citizens United decision - the decision which allows corporations to make unlimited expenditures on political campaigns - are being taunted by Ted Olson. Don't believe me? This is what Mr. Olson wrote on the blog for the Harvard Law School Forum on Corporate Governance and Financial Regulation:

Finally, the decision creates new corporate governance issues by shifting efforts to restrict corporate political speech from Congress to the boardroom. In Citizens United, the Supreme Court rejected the government's argument that corporate political speech can be banned in order to protect dissenting shareholders from being compelled to fund political speech with which they disagree. In the aftermath of Citizens United, it can be expected that shareholders in some corporations will attempt to adopt measures restricting corporate participation in the electoral process and mandating disclosure of corporations' political activities.

Now, granted, this is not merely a taunt: Mr. Olson's view is a very convenient one for him to hold because when the torrent of corporate money starts to flood the electoral system and marginalizes actual human voters in favor of corporations, Mr. Olson and the five members of the Supreme Court who sided with him can wash their hands of the negative impacts and say "if shareholders want to prevent corporate spending on elections, they could have." But can they? Will corporate democracy really protect shareholders? Or are corporations about as democratic as today's Supreme Court is Democratic? (the big and little "D" is intentional). Lets see.

Mr. Olson must know that corporate spending in state elections is already permitted in some states and it is extremely difficult for shareholders to challenge the spending because such decisions are protected from challenge by the "business judgment rule." Some of these limitations are well explained in two recent articles I came across: one is from Elizabeth Pollman in the Yale Law Journal and the other one is a report by the Brennan Center for Justice by Ciara Torres-Spelliscy.

Okay, so litigation is not the answer. What other options are available to shareholders to prevent corporations from spending their money on Federal elections? Well, the shareholder could just sell their shares, most likely at a loss (the Supreme Court liked that argument.) Aside from the issue of losing money (bad for almost everyone), selling shares is not really an effective recourse for the aggrieved shareholder because (a) the corporation is likely to spend the money anyhow and (b) the corporation's share price is unlikely to take a hit because if the fundamentals of the corporation are strong those shares will just be bought by a shareholder who agrees with the spending decision or is apolitical. (Along those lines, I should mention that the idea of "progressive" corporations trading at some type of "political premium" is pretty exciting and intriguing - but that's more of a pipe dream and, in any event, its a topic for another post).

How else could corporate democracy potentially prevent corporate spending on elections? Well, a corporation's board could, in theory, forbid management from excising their new found right to participate in the political process. Unfortunately, it's extremely doubtful that any corporate board would do so on its own volition. As I've pointed out in previous posts, corporate boards tend to be aligned with management and I'm sure management can make a convincing case that bankrolling political activity is in the corporation's best interest. Shareholders can go around the board and use the "shareholder proposal" process found in Securities and Exchange Commission Rule 14a-8 to attempt to keep corporate dollars out of political campaigns. Could that work? Is that what Mr. Olson had in mind? Lets have a look.

In its current incarnation, Rule 14a-8 allows shareholders who meet certain ownership and length-of-holding thresholds to place proposals on a proxy for fellow shareholders to consider. Shareholder proposals are usually not binding (meaning that the board is not forced to adopt them). However, if the proposal garners the support of the majority of shareholders, it's hard for the board to reject it out of hand. Such proposals are strongly considered and, sometimes, pass. However, Mr. Olson must know that the shareholder proposal process will probably not be much of a help because corporations and their lawyers try mightily to prevent shareholder proposals from even appearing on corporate proxies. To give a brief primer, Rule 14a-8 works like this: first, a proposal is submitted to the corporation. The corporation has the option of accepting or rejecting the proposal. If the corporation decides to reject the proposal it must provide a reason for the rejection to the shareholder and the SEC. The submission to the SEC is commonly referred to as a request for a "no-action letter." It's called a "no-action letter" because what the corporation is really requesting is an advisory decision from the SEC's Division of Corporate Finance that the SEC will not take action ("no-action") if the corporation excludes the shareholder proposal from its proxy.

Need an example? Here is a letter from November 2009 from General Electric requesting a no-action letter from the SEC. In the letter, GE is asking for permission to exclude a shareholder proposal which would require shareholder ratification of executive compensation recommendations made by GE's board of directors' compensation committee (a type of "say-on-pay" proposal) on the grounds that the proposal is "false and misleading." I happen to think it's a stretch to say there is something "misleading" about a proposal that would, if enacted, merely require the board's compensation committee to seek shareholder ratification of executive pay recommendations but that's how the system works: shareholders propose, corporations oppose. Oh, and one more thing: if you took a look at GE's request for the no-action letter, you will notice that it was prepared by lawyers at the law firm of Gibson, Dunn & Crutcher LLP. Gibson Dunn is Mr. Olson's firm. Seems that members of Mr. Olson's firm are deeply immersed in the shadowy business of excluding shareholder proposals from proxies no matter how benign those proposals may be.

Therefore, Mr. Olson and his partners must be aware that SEC Rule 14a-8(i)(7) allows corporations to exclude from their proxy proposals "relating to the company's ordinary business operations." So does Mr. Olson consider campaign contributions to not to be the "ordinary business" of a corporation? That is unlikely: it was Mr. Olsen, after all, who argued that corporations have all the same free speech rights as actual human beings. Indeed, one of the premises of Mr. Olson's argument is that corporations can participate in the political process to the same extent as human voters. In other words, it's the ordinary business of corporations to participate in the political process. Mr. Olson's argument is particularly unfortunate because, before Citizens United, a colorable argument could be made that political contributions were not the ordinary business of a corporation.

For example, in this recent case, the SEC actually refused to give a no-action letter to Halliburton when it sought to exclude a shareholder proposal asking it to disclose its political contributions. Although the SEC does not reveal its reasoning (welcome to the bureaucracy) there is a good chance that the SEC based its decision on a 1998 "staff guidance" which explained that "significant social policy issues . . . generally would not be considered to be excludable [under SEC Rule 14a-8(i)(7)], because the proposals would transcend the day-to-day business matters and raise policy issues so significant that it would be appropriate for a shareholder vote." In the Halliburton case, the shareholder making the proposals explained that corporate participation in elections was a "significant social policy" issue that transcended the "day-to-day" business operations of the company. The shareholder based its reasoning, in part, on the controversy surrounding the McCain-Feingold Campaign Finance Reform bills which banned corporate spending in elections. Now, thanks to Mr. Olson's advocacy, those provisions of McCain-Feingold are gutted and the SEC will probably reach the opposite conclusion if (and when) it considers a request for a no-action letter from a company seeking to exclude a proposal to prohibit campaign spending.

And even if the SEC decides that political contributions on the magnitude allowed by Citizens United are not the "ordinary business" of a corporation, Mr. Olson's partners at Gibson Dunn are no doubt ready to get creative and seek exclusion of shareholder proposals to limit corporate contributions pursuant to SEC Rule 14a-8(i)(3) on the grounds that proposals are "misleading" because they do not define "political contribution" or some other such nonsense. (That is basically the argument made by JP Morgan Chase in this recent no-action request letter. Hopefully, the SEC will see JP Morgan's request for what it is. In fact, JP Morgan's position is downright comical because it requires you to believe that a corporation that was heavily involved in creating complex financial derivatives now claims it can't figure out what, exactly, constitutes a "political contribution.") Then there are some other possible grounds for exclusion permitted by the SEC rules that are more technical (but equally as potent). For example, corporations might claim that the proposal can't be implemented; has been implemented; that it conflicts with a company proposal relating to political contributions; . . . etc, etc. The point is this: contrary to Mr. Olson's contentions, shareholders probably do not have the ability to preclude corporate spending on political campaigns. So could Mr. Olson be somewhat insincere in his professed belief that corporate democracy will protect shareholders? Or could Mr. Olson, one of American's most respected lawyers, be ignorant of how the system works? I would go for the former.

So where does that leave us? It's pretty clear that Mr. Olson and the other proponents of corporate money in politics have made an argument with very little actual real-world support. Go figure. Not surprisingly, the Supreme Court seemed to be, in part, persuaded by it. Since it's such a flimsy argument, perhaps the high court was just looking for yet another counterfactual proposition on which to rest their regressive decision. That seems likely.

As for Mr. Olson, he is one of the most respected attorneys in the nation (although he has an unfortunate tendency to represent moneyed interests over the rest of us). Credibility is the currency of lawyers, especially high profile lawyers. Therefore, maybe Mr. Olson truly believes that the battle has shifted from Congress to the corporate board room and that "corporate democracy" is really the answer to keeping corporate money out of elections. Maybe. If he does, he needs to make it happen. Perhaps Mr. Olson should actively campaign for a new SEC staff guidance that makes it clear that political contributions are not the "ordinary business" of corporations and that shareholder proposals seeking to limit them cannot be excluded under SEC Rule 14a-8(i)(7). Or maybe Mr. Olson should throw his support behind the "Citizens Right to Know Act" which would require shareholder approval of political spending or support the Fair Elections Now Act which would establish some form of public funding for U.S. House and Senate candidates. As we fight for the future of our democracy, we could use his help. Perhaps that is too much of a taunt, Mr. Olson?

(Special thanks to my friend Robert Donovan for his inspiration and assistance).