[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
CORPORATE GOVERNANCE AFTER
CITIZENS UNITED
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON CAPITAL MARKETS,
INSURANCE, AND GOVERNMENT
SPONSORED ENTERPRISES
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION
__________
MARCH 11, 2010
__________
Printed for the use of the Committee on Financial Services
Serial No. 111-109
----------
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56-773 PDF WASHINGTON : 2010
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Washington, DC 20402-0001
HOUSE COMMITTEE ON FINANCIAL SERVICES
BARNEY FRANK, Massachusetts, Chairman
PAUL E. KANJORSKI, Pennsylvania SPENCER BACHUS, Alabama
MAXINE WATERS, California MICHAEL N. CASTLE, Delaware
CAROLYN B. MALONEY, New York PETER T. KING, New York
LUIS V. GUTIERREZ, Illinois EDWARD R. ROYCE, California
NYDIA M. VELAZQUEZ, New York FRANK D. LUCAS, Oklahoma
MELVIN L. WATT, North Carolina RON PAUL, Texas
GARY L. ACKERMAN, New York DONALD A. MANZULLO, Illinois
BRAD SHERMAN, California WALTER B. JONES, Jr., North
GREGORY W. MEEKS, New York Carolina
DENNIS MOORE, Kansas JUDY BIGGERT, Illinois
MICHAEL E. CAPUANO, Massachusetts GARY G. MILLER, California
RUBEN HINOJOSA, Texas SHELLEY MOORE CAPITO, West
WM. LACY CLAY, Missouri Virginia
CAROLYN McCARTHY, New York JEB HENSARLING, Texas
JOE BACA, California SCOTT GARRETT, New Jersey
STEPHEN F. LYNCH, Massachusetts J. GRESHAM BARRETT, South Carolina
BRAD MILLER, North Carolina JIM GERLACH, Pennsylvania
DAVID SCOTT, Georgia RANDY NEUGEBAUER, Texas
AL GREEN, Texas TOM PRICE, Georgia
EMANUEL CLEAVER, Missouri PATRICK T. McHENRY, North Carolina
MELISSA L. BEAN, Illinois JOHN CAMPBELL, California
GWEN MOORE, Wisconsin ADAM PUTNAM, Florida
PAUL W. HODES, New Hampshire MICHELE BACHMANN, Minnesota
KEITH ELLISON, Minnesota KENNY MARCHANT, Texas
RON KLEIN, Florida THADDEUS G. McCOTTER, Michigan
CHARLES A. WILSON, Ohio KEVIN McCARTHY, California
ED PERLMUTTER, Colorado BILL POSEY, Florida
JOE DONNELLY, Indiana LYNN JENKINS, Kansas
BILL FOSTER, Illinois CHRISTOPHER LEE, New York
ANDRE CARSON, Indiana ERIK PAULSEN, Minnesota
JACKIE SPEIER, California LEONARD LANCE, New Jersey
TRAVIS CHILDERS, Mississippi
WALT MINNICK, Idaho
JOHN ADLER, New Jersey
MARY JO KILROY, Ohio
STEVE DRIEHAUS, Ohio
SUZANNE KOSMAS, Florida
ALAN GRAYSON, Florida
JIM HIMES, Connecticut
GARY PETERS, Michigan
DAN MAFFEI, New York
Jeanne M. Roslanowick, Staff Director and Chief Counsel
Subcommittee on Capital Markets, Insurance, and Government Sponsored
Enterprises
PAUL E. KANJORSKI, Pennsylvania, Chairman
GARY L. ACKERMAN, New York SCOTT GARRETT, New Jersey
BRAD SHERMAN, California TOM PRICE, Georgia
MICHAEL E. CAPUANO, Massachusetts MICHAEL N. CASTLE, Delaware
RUBEN HINOJOSA, Texas PETER T. KING, New York
CAROLYN McCARTHY, New York FRANK D. LUCAS, Oklahoma
JOE BACA, California DONALD A. MANZULLO, Illinois
STEPHEN F. LYNCH, Massachusetts EDWARD R. ROYCE, California
BRAD MILLER, North Carolina JUDY BIGGERT, Illinois
DAVID SCOTT, Georgia SHELLEY MOORE CAPITO, West
NYDIA M. VELAZQUEZ, New York Virginia
CAROLYN B. MALONEY, New York JEB HENSARLING, Texas
MELISSA L. BEAN, Illinois ADAM PUTNAM, Florida
GWEN MOORE, Wisconsin J. GRESHAM BARRETT, South Carolina
PAUL W. HODES, New Hampshire JIM GERLACH, Pennsylvania
RON KLEIN, Florida JOHN CAMPBELL, California
ED PERLMUTTER, Colorado MICHELE BACHMANN, Minnesota
JOE DONNELLY, Indiana THADDEUS G. McCOTTER, Michigan
ANDRE CARSON, Indiana RANDY NEUGEBAUER, Texas
JACKIE SPEIER, California KEVIN McCARTHY, California
TRAVIS CHILDERS, Mississippi BILL POSEY, Florida
CHARLES A. WILSON, Ohio LYNN JENKINS, Kansas
BILL FOSTER, Illinois
WALT MINNICK, Idaho
JOHN ADLER, New Jersey
MARY JO KILROY, Ohio
SUZANNE KOSMAS, Florida
ALAN GRAYSON, Florida
JIM HIMES, Connecticut
GARY PETERS, Michigan
C O N T E N T S
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Page
Hearing held on:
March 11, 2010............................................... 1
Appendix:
March 11, 2010............................................... 29
WITNESSES
Thursday, March 11, 2010
Baran, Jan, Partner, Wiley Rein LLP.............................. 17
Coffee, John C., Jr., Adolph A. Berle Professor of Law, Columbia
University Law School.......................................... 5
Klausner, Michael, Nancy and Charles Munger Professor of Business
and Professor of Law, Stanford Law School...................... 15
Minow, Nell, Editor and Co-Founder, The Corporate Library........ 13
Sandstrom, Karl J., Of Counsel, Perkins Coie..................... 8
Verret, J.W., Assistant Professor of Law, George Mason University
School of Law.................................................. 12
Yerger, Ann, Executive Director, Council of Institutional
Investors...................................................... 10
APPENDIX
Prepared statements:
Kanjorski, Hon. Paul E....................................... 30
Garrett, Hon. Scott.......................................... 31
Baran, Jan................................................... 33
Coffee, John C., Jr.......................................... 44
Klausner, Michael............................................ 65
Minow, Nell.................................................. 72
Sandstrom, Karl J............................................ 79
Verret, J.W.................................................. 84
Yerger, Ann.................................................. 86
Additional Material Submitted for the Record
Kanjorski, Hon. Paul E.:
Written statement of Lisa Gilbert, U.S. PIRG................. 147
Capuano, Hon. Michael E.:
Report of the Brennan Center for Justice by Ciara Torres-
Spelliscy entitled, ``Corporate Campaign Spending: Giving
Shareholders A Voice''..................................... 149
Written statement of Ciara Torres-Spelliscy.................. 192
Excerpt from U.S. News & World Report by Ciara Torres-
Spelliscy entitled, ``To Fix the Supreme Court's Citizens
United Decision, Copy the Brits''.......................... 211
CORPORATE GOVERNANCE AFTER CITIZENS UNITED
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Thursday, March 11, 2010
U.S. House of Representatives,
Subcommittee on Capital Markets,
Insurance, and Government
Sponsored Enterprises,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 10:30 a.m., in
room 2128, Rayburn House Office Building, Hon. Paul E.
Kanjorski [chairman of the subcommittee] presiding.
Members present: Representatives Kanjorski, Capuano, Lynch,
Perlmutter, Grayson; Garrett and Castle.
Ex officio present: Representative Frank.
Chairman Kanjorski. This hearing of the Subcommittee on
Capital Markets, Insurance, and Government Sponsored
Enterprises will come to order. Pursuant to committee rules,
each side will have 20 minutes for opening statements. Without
objection, all members' statements will be made a part of the
record.
The Chairman. Paul, I don't think your microphone is on.
Chairman Kanjorski. Can you hear me now? Still off? Okay.
Well, I get a chance to say good morning again. For the
convenience of the caucus and this committee, we will first
recognize the chairman of the full committee, Chairman Frank,
for his opening statement.
The Chairman. I thank the chairman of the subcommittee.
People were asked, apparently there was a Democratic caucus
going on, but having invited a number of very busy people to a
hearing, I think it would be inappropriate for us to either
cancel this or delay it, so we are going to go ahead with this
hearing.
This is a very important subject. The Supreme Court has
made a decision that many of us dislike. I must say I was
struck by the sensitivity of the Chief Justice. Since he's not
here, I can comment without further wounding his apparently
delicate feelings. But he was quoted as saying that he thought
it troubling that he had to sit in a room full of Members of
Congress who were cheering a criticism of his opinion, and I
trust that sensitivity does not translate into his First
Amendment rulings going forward. The notion that people should
be constrained about criticizing a Supreme Court ruling in the
presence of a Justice is not one that I have a great deal of
sympathy for.
But our purpose today is not to criticize the ruling--a
little side thing we may do, but that's not our purpose. It is
to, in an entirely appropriate and constitutional way, occupy
the space that the opinion leaves for appropriate regulation.
The Court has ruled that corporations have certain rights, but
I guess if we were to follow the Declaration of Independence,
if they are endowed by their Creator with those inalienable
rights, since we are the creators of corporations, because they
get their form from law, we can put some rules here. And the
purpose of this hearing is to, in an entirely constitutional
way, as I say, explore ways in which we can, in my view,
protect the political process from further diminution of the
one man, one vote principle by money coming in, in
inappropriate ways.
What we are talking about is disclosure and shareholder
voting. I believe what we are doing is entirely constitutional
and within the spirit of the opinion, and I think we are
talking about ways that we can--and in my judgment, what the
Supreme Court did undercuts the democratic process. I think we
are reducing that, but even people who were all for the
decision don't necessarily have to be against this bill.
But what we are talking about here is a matter of corporate
democracy and of corporate governance, and what we have done
and I think the gentleman from Massachusetts and the gentleman
from Florida, Mr. Grayson, has worked with him, and Mr. Capuano
of Massachusetts and others, have come up with a very
appropriate way to make sure that democracy is protected and
the integrity of the electoral process is protected. And I
thank the chairman of the subcommittee for calling this
hearing, and this is something we intend to move on. Mr.
Chairman, I appreciate your recognizing me.
Chairman Kanjorski. The Chair recognizes Representative
Castle for 5 minutes.
Mr. Castle. Thank you, Mr. Chairman. And I would like to
thank obviously all the witnesses for being here today, and I
appreciate you holding today's hearing. Corporate governance is
a very important issue to me and to this committee obviously.
In my home State of Delaware and across the country,
corporations are a major source of economic activity. In this
economy when we must remain focused on job retention and job
creation, we must be especially careful when considering
proposals that would alter 150 years of State corporate
governance laws.
With that said, I believe the Congress must act in response
to the campaign finance restrictions overturned by the Citizens
United v. FEC case. This ruling now allows corporations and
unions to spend unlimited funds from their general treasuries
in campaign advertisements targeted at a specific candidate. I
was one of four Members of Congress who filed an amicus brief
prior to the ruling asking the Supreme Court to uphold the laws
that long prevented corporate and union spending from being a
deciding force in the political process. For this reason, I
have introduced a bill with Representative David Price from
North Carolina called the Stand By Every Ad Act, which extends
the Stand By Your Ad disclosure currently required of
candidates and political advertisements to CEOs of corporations
and the union leaders. I believe this is a targeted response to
the Citizens United case.
I look forward to listening to the testimony of the
witnesses before us today. We know there's a lot of other
legislation, and I would be interested in your comments about
that and again thank you all for being here. We look forward to
the hearing. I yield back, Mr. Chairman.
Chairman Kanjorski. Thank you, Mr. Castle. Today, we meet
to examine the likely effects of the Supreme Court's decision
in Citizens United v. the Federal Election Commission. In
response to this groundbreaking ruling, Members of Congress
have introduced no less than 30 bills. While other panels in
the House have jurisdiction over many of these measures, the
Financial Services Committee has the responsibility to examine
these bills related to shareholders' rights and corporate
governance.
Like many, I was disappointed in the Supreme Court's
ruling. In our system of capitalism, corporations enjoy many
benefits designed to promote the efficient allocation of
resources in a variant economy. Unduly influencing elections
should not be one of those privileges. Moreover, shareholders
have financial interests in companies, not political interests.
Finally, I should note that in our political system, people
vote. Corporations lack such rights.
To limit the influence of the Citizens United decision, the
Capital Markets Subcommittee now has under consideration
several proposals. Those thoughtful bills generally aim to
increase shareholders' participation in the electioneering
decisions of public companies, enhance public transparency on
corporate campaign spending, and contain corporate political
activities. At the very least, we ought to act to empower
shareholders to determine whether and how corporations can
spend their money for political purposes. Shareholders should
not expect that a company will use their money to invest in
candidates that the shareholders themselves do not support. In
this regard, corporate management should obtain some form of
approval from their shareholders regarding corporate campaign
expenditures.
We also ought to enhance public disclosures of corporate
political expenditures. Many have said that transparency is the
best disinfectant. Better information about how corporations
spend their money on political activities will help to hold
corporations accountable for their actions. Today, we will
examine pending legislative proposals introduced by Mr.
Ackerman, Mr. Capuano, Mr. Peters, Mr. Grayson, and Ms. Kilroy
that achieve these desired ends. We will also explore ways to
refine these bills.
I look forward to a vigorous debate at this hearing so that
we can determine the best way to move ahead on these important
policy matters. Moreover, because we have many ideas
concurrently in motion, I am also hopeful that we can work
today to achieve consensus, improve coordination, and ensure a
comprehensive legislative reaction.
In sum, while courts have long granted corporations the
status of personhood, they are not actually people. We need a
legislative response to the Citizens United case in order to
restore the balance in our democratic system. And corporate
governance reforms represent an important facet of an effective
solution. Such reforms can give American citizens--the living,
breathing, voting people we are here to represent--faith that
our system of representative democracy will long endure and
thrive.
Mr. Capuano is recognized for 3 minutes.
Mr. Capuano. Thank you, Mr. Chairman. First of all, I want
to welcome the witnesses today. My hope is that--we have been
working on this original draft bill for a while now. We have
actually taken out some of the provisions I think some people
might be concerned with, that I was concerned with, relative to
the numbers of votes specifically by shareholders and the like.
And I hope that you have a chance to look at the redrafted bill
soon to get further input. I think we have addressed most of
the concerns that some people might raise that I had myself.
And of course, what this bill is, is exactly what has
already been told. The bill is an attempt to do what we can do
within the limits of the law, without impeding anybody's First
Amendment rights or rights to gather or anything else. When I
was in law school, I was taught that corporations had three
basic rules: Use somebody else's money; make a profit; and keep
both. My understanding is that the Supreme Court has kind of
expanded that just a little bit more, and I respect that. I may
disagree with it vehemently, but it's not the first Supreme
Court ruling I have ever disagreed with, and I have no doubt
that it will not be the last. At the same time, that does not
mean that we should not then have an appropriate and thorough
response to it to the best of our abilities, knowing full well
that someone will bring something to court again. That's why we
have this system. We do what we think is best to the best of
our abilities without intentionally breaking any laws or
violating the Constitution and have those attempts tested in
court. And that's why we're back today. We thought we had fixed
this once, but apparently we didn't, so now we'll try it again.
I'm looking forward to hearing testimony today and ideas as
we go forward as to what it is that we can do, knowing full
well that some people think that we shouldn't do anything, and
I respect that position. I just strongly disagree with it. And
I'm even open to suggestions by people who do disagree with
this. I'm not trying to intentionally stifle corporations,
though I would like to. I make no bones about it. My
preferences lost in court a few months ago, and that's life. At
the same time, all I want now is if that's going that be the
case, the question then becomes, whose money is this that
corporations can now use? And the answer is, it is
shareholders' money. That's whose money it is. And if that's
their money, if they choose to be involved in politics, fine.
Now I would love to get it to a situation where we could have
it only direct money, and I would love to be open to that idea,
because I would love to have ads on TV against me saying, don't
vote for Mike Capuano, he's a horrendous guy, brought to you by
the Exxon Corporation. That would be perfectly okay with me. We
can't get there yet, and I haven't found a way to require that
just yet, so I would love to hear ideas on that.
But in the meantime, we're going to do the best we can to
come up with a bill that is constitutional yet thorough and
clear to make sure that the free speech that has now been given
to these transparent yet fake organizations, at least
responsible to those people who own the money, which is
shareholders. So with that, Mr. Chairman, I yield back my one
second.
Chairman Kanjorski. Thank you very much. It is my pleasure
to introduce the panel and call for their testimony. I want to
thank the entire panel for appearing before the subcommittee
today, and without objection, your written statements will be
made a part of the record. You will each be recognized for a 5-
minute summary of your testimony.
First, we have Professor John C. Coffee, Jr., Adolf A.
Berle Professor of Law, Columbia Law School. Professor Coffee?
STATEMENT OF JOHN C. COFFEE, JR., ADOLPH A. BERLE PROFESSOR OF
LAW, COLUMBIA UNIVERSITY LAW SCHOOL
Mr. Coffee. Thank you, Chairman Kanjorski, and members of
the subcommittee. My message is going to be very simple:
Congress cannot really fight with the Supreme Court or with the
scope of the First Amendment. What Congress can do, what
Congress should do, and what I would say Congress must do, is
increase the transparency and accountability surrounding
corporate involvement in the political process.
The best means to that end is to use Congress' unquestioned
power over the Federal securities laws and particularly the
proxy rules, because that already is an established system of
disclosure that is widely used and relied on, and only modest
adjustments are necessary.
The goal, however, has to be not only to increase
transparency and disclosure, but to give shareholders an
effective remedy by which to challenge decisions of which they
disapprove, because this is a world in which shareholder and
managerial interests are not well aligned. There may be
perfectly legitimate corporate contributions, but for every
dollar contributed by a corporation that maximize shareholder
wealth, there are other dollars that are contributed to pursue
the personal, political or ideological agenda of senior
managers, and all of that is hidden. It is hidden because we
today have an election contribution system that works through
conduit organizations, typically trade associations and others,
and there is no obligation for the corporation to disclose non-
earmarked payments to trade associations, even though they're
perfectly aware and are actually told by the trade association
that these payments are substantially going for political and
electioneering expenses.
Our focus I think today is on implementation, and what
would I suggest? First of all, I would ask the SEC to form an
advisory committee to reexamine its disclosure rules. We have
the end report on Form 10K, the quarterly report on Form 10Q
and the proxy statement, all of which are providing
shareholders a rich range of information, but absolutely
nothing today about political contributions or contributions to
conduit organizations such as trade associations. Here you
don't need legislation. We need to prod the SEC to put
something else on their rather busy and overcrowded agenda.
That's step one.
Step two, we need to give shareholders an actual remedy
that allows them contest a decision once it's brought to light.
And here there's a problem that Citizens United just ignores.
It assumes that shareholders have practical remedies by which
to contest decisions of managers to make contributions. In
fact, they have very few rights. What can we do? As a corporate
governance specialist, let me tell you that there are always
really three basic options: You can give shareholders the right
to sue. I'm not recommending that. I think it would be largely
futile, but others can suggest that.
You can give shareholders increased voice, and increased
voice means a right to vote on specific proposals that are
focused on a particular company's situation and what has been
disclosed about that company's behavior.
Next, you can finally give shareholders a right to exit, a
right to sell their shares if they are dissatisfied. And that
right only works if they are given specific disclosure about
what contributions have been made, how they have been made,
what the process was within the company for approving these,
and what the rationale was.
Now most importantly, what I would tell you is that to
really give shareholders an effective remedy, they must be
given an enhanced right to vote. Classically, the right to vote
in this field was implemented through shareholder-approved
bylaw amendments. For generations, shareholders have had the
rights in virtually every State to adopt bylaw amendments that
could regulate anything in the corporation's business and
affairs. Such bylaw amendments might, for example: one, require
a committee of independent directors to approve all political
contributions and electioneering expenses; two, require that
there be a report annually to shareholders of what the purposes
were and what the justifications were and what the process was
for the contributions that were made; and three, prohibit
certain kind of payments that are not really related to the
company's line of business or to the goal of shareholder wealth
maximization, but appear to be related to social issues,
whether it's same-sex marriage or abortion, either side of
these issues, there's no real nexus between those issues and
shareholder wealth maximization.
Such bylaw amendments do not have to obtain a majority vote
to be effective. There's a lot of experience here. And the
moment you have a bylaw amendment that can get a 20 percent
shareholder vote and could be put up in the next year,
management will come in and negotiate, and you'll get a
practical solution between the shareholders and the management
because no management wants to have a quarter or more of its
shareholders dissatisfied. So once these issues can be put on
the agenda, then we will get a practical resolution. That has
been the experience in a lot of areas with shareholder bylaw
proposals.
But there are two major obstacles, and they are both new,
and this is where implementation really hits a rocky road:
first, there's a major State law problem; and second, there's a
major problem with SEC rules as they are currently interpreted.
The major State law problem is a decision a year-and-a-half-old
called CA Inc. v. AFSME. It was a Delaware Supreme Court
decision a year-and-a-half ago, and it says that shareholder
power to amend the bylaws can never intrude upon, encroach or
interfere with the power of the board of directors to
substantively direct the business and affairs of the company.
It's an old tension, but this is a new decision, and it has
really curbed the power of shareholder bylaw amendments. This
is an area where I think Congress could add a simple modest
provision to the Federal securities laws and the Security
Exchange Act of 1934, that could be limited just to bylaw
amendments dealing with corporate political activity and
electioneering expenses giving shareholders a uniform Federal
rule, because this is not an area where we want State-by-State
variation, so that shareholders of any public corporation could
adopt a bylaw amendment restricting or curbing or otherwise
influencing corporate political behavior and corporate election
expenses.
The idea here would be to give a continuing right to adopt
bylaw amendments, because if we only have one vote up front,
the problem is there we'll get a blanket authorization that the
shareholders will vote forward in order not to cripple the
company. We want our specific amendments from time to time that
are focused on what the company is doing.
That is the State law problem. Now, we move to the SEC's
problem. Shareholder voting basically depends today on one SEC
rule called Rule 14(a)(8). Shareholders can place an issue on
the corporation's agenda. The issue might be a bylaw amendment,
or more typically the issue has been a shareholder request to
get an informational report. So shareholders may request the
board of directors to report to them about the company's
behavior and activities in the political process and election
expenses. That is a technique that has been used for 20 years
or more.
But something new has happened. In the last year, year-and-
a-half, the SEC has fallen back on several broad, ambiguous
exemptions under Rule 14(a)(8) and it has ruled that the
corporation may exclude shareholder proposals seeking more
information about the corporation's involvement in politics or
in campaign contributions. It may do so, the SEC staff has
ruled, at a very low level at the SEC, because there is a broad
exemption in 14(a)(8) that says shareholders may not make
proposals that relate to ``ordinary business operations.'' That
is a very ambiguous phrase, ``ordinary business operations.''
And the staff has said that any proposals dealing with
lobbying or political contributions are really dealing with
ordinary business operations. Frankly, I think that's
symptomatic. If we say that the company's involvement in
politics or in campaign contributions is only ordinary business
operations, we are assuming a giant conclusion without
information about what is really going on. Thus, I would
suggest that this committee can prod the SEC to reexamine these
broad and ambiguous resolutions.
The truth is that under 14(a)(8), the SEC staff once took
the position that broad bylaws--the broad policy saying the
company would not hire or retain any employee who was gay, was
a matter of ordinary business operations. Over time, the SEC
became embarrassed by that position, and Congress prodded them
to reexamine it, and now they have ruled that any kind of
discrimination is not a matter of ordinary business operations.
I similarly think that their position that political
campaign contributions are always ordinary business operations
is overly broad, undesirable, and has to be reversed. Until it
is reversed, shareholders are not going to have an effective
remedy by which they can prod and push the company to take
stronger, clearer positions.
In conclusion, I'm suggesting there really are three things
that should be done. One, Congress can prod the SEC to
reexamine its disclosure rules, which is a continuous
disclosure system involving the 10K, the 10Q and the proxy
statement, and have a section in each that describes what the
company is doing in its political operations. That's something
that the SEC can do without legislation, but it has to be
prodded because the SEC often has a very full plate and isn't
looking at these issues today.
Two, I think Congress should prod the SEC to revise and
narrow its overly broad exemptions under Rule 14(a)(8). There
shouldn't be any concept that ordinary business operations
includes political contributions.
Finally, and I'll stop here, most ambitiously, Congress
could amend the Securities Exchange Act and give the
shareholder the right to adopt bylaw amendments that would
limit corporate involvement in political and electioneering
expenses. Then and only then would the key premise to Citizens
United that shareholders can take effective action become
accurate.
Thank you.
[The prepared statement of Professor Coffee can be found on
page 44 of the appendix.]
Chairman Kanjorski. Thank you very much, Professor. Now, we
have a little bit of a dilemma. We have about what, 10\1/2\
minutes left, and I want to give the other witnesses equal
time, since we allowed the professor to run over a little bit.
Do you want to take your 5 minutes now? But we will have to
limit you to no more than 6 minutes, because we have to make a
vote on the Floor.
Mr. Sandstrom. I will happily try to summarize my testimony
in 6 minutes.
Chairman Kanjorski. Okay, then. We will recognize Mr. Karl
Sandstrom, of counsel, Perkins Coie.
Mr. Sandstrom.
STATEMENT OF KARL J. SANDSTROM, OF COUNSEL, PERKINS COIE
Mr. Sandstrom. Chairman Kanjorski, Congressman Castle,
Congressman Capuano, I thank you for the opportunity to appear
here today to testify on an issue that I think is of great
importance. I will summarize my testimony and request that the
public opinion polls that I refer to be made part of the
record.
When Citizens United was first argued, the issue before the
Court was whether Citizens United was required to disclose the
corporations and other contributors who paid for the
advertising and broadcasting of the film. The argument was made
to the Court that disclosure was likely to chill giving by
corporations. Many corporations, the Court was told, prefer
anonymity. They did not want to be associated with
controversial issues like climate change and financial
regulation.
In an 8 to 1 decision, the Court rejected this argument and
found that disclosure was essential to the ability of
shareholders, and more generally to the public, to monitor
management's use of corporate resources. Justice Kennedy wrote,
``With the advent of the Internet, prompt disclosure of
expenditures can provide shareholders and citizens with
information needed to hold corporations and elected officials
accountable for their positions and supporters. Shareholders
can determine whether their corporation's political speech
advances the corporation's interest in making profits and
citizens can see where their elected officials are in the
pocket of so-called monied interests.''
When the case was reargued, the issue that was added to the
case was whether corporations enjoyed the same rights as
citizens to spend unlimited sums promoting or opposing their
candidates of choice. One argument that was made to the Court
against extending that right to corporations is that dissenting
shareholders' reports to underwrite spending in support of
candidates that they personally opposed. The Court rejected
this argument, finding that the government's legitimate
interests in protecting shareholders could be achieved through
strengthening the rights of shareholders through corporate
governance. The Court found that there was little evidence of
abuse that could not be corrected by shareholders through the
procedures of corporate democracy.
This decision stands for two propositions that are
particularly relevant to this committee: first, disclosure
served important governmental interests; and second, corporate
governance is the means the Court envisions as being available
for companies to be held accountable for their political
spending. If transparency and accountability in the wake of
Citizens United is to be more than a mirage, Congress will need
to act.
Current law is not up to the task. Corporations cannot
disclose to shareholders what they do not know. Current law
encourages companies to rely on outside groups to do their
politics. The less a company knows about the political spending
that it finances, the less likely it will be publicly
associated with that spending. The more involved a corporation
is in making an expenditure, the greater the likelihood that it
will not need to be disclosed.
Current law perversely creates incentives for corporations
to remain ignorant regarding how their money is spent. The
first step is to require corporations to be made aware of how
corporate funds are used. Corporations should know and in turn
inform their shareholders and the public when corporate money
is being used to support or oppose a candidate. Unless a
corporation is provided with the necessary information, it
should not be allowed to contribute to an outside organization
that engages in politics. Persons using a corporate donation to
pay for political ads should be required to disclose its
spending to the public and to the donating corporation and
confirm that the corporate donors approved of the use.
Transparency is insufficient without accountability.
Substantial political expenditures should require a
shareholder, at least a minimum, board of director approval.
The approval needs to be specific and not general. The
shareholders and the board need to know what candidates are
being promoted or attacked with corporate funds, and why this
spending is in the interest of the corporation.
If the shareholder approval is required, an institutional
shareholder should not be allowed to sit on the sidelines. An
institutional shareholder needs to independently evaluate the
proposed spending and determine it is in the best interests of
its beneficiaries.
In conclusion, only Congress can provide the protection to
which the Court suggests shareholders are entitled. Therefore,
I would urge this committee to accept the Court's challenge and
bring transparency and accountability to corporate political
spending.
[The prepared statement of Mr. Sandstrom can be found on
page 79 of the appendix.]
Chairman Kanjorski. We are so well organized right now in
the House that we can have a conference going on with the
Republicans and a Democratic caucus going on at the same time
and have a quorum call. So you can see we are really on track
here to get the House well organized and on its way. And
unfortunately, in the middle of this hearing, we have the
pending quorum call.
What we are going to do is take a 15-minute recess so we
can record our votes, and then we will come back and finish the
witness statements. So with no further ado, the hearing will
stand in recess for 15 minutes.
[recess]
Chairman Kanjorski. The committee will come to order. The
next presenter will be Ms. Ann Yerger, executive director,
Council of Institutional Investors.
Ms. Yerger.
STATEMENT OF ANN YERGER, EXECUTIVE DIRECTOR, COUNCIL OF
INSTITUTIONAL INVESTORS
Ms. Yerger. Good morning--I think it's still morning. Thank
you very much for the opportunity to share the Council's views
on the very important issues under consideration today. By way
of introduction, the Council is a nonpartisan association of
public, union, and corporate employee benefit plans with assets
exceeding $3 trillion. Council members are responsible for
safeguarding assets used to fund the retirement benefits of
millions throughout the United States. Our members are quite
diverse and include the State funds from almost all of your
States, along with corporations such as Johnson & Johnson and
unions such as the AFL-CIO. So clearly, there is a wide variety
of views on issues within the membership.
Our members do share some very important characteristics.
First, they have a very significant commitment to the domestic
markets, on average investing about 60 percent of their
portfolios in stocks and bonds of U.S. public companies, and
they are long-term patient investors due to their lengthy
investment horizons and heavy commitment to passive investment
strategies.
As an initial matter, I want to state up-front that
consistent with our membership-approved policies, the Council
has no position on the legal issues arising from the Citizens
United decision, including whether there should be limits on
corporate political activity. And since we are an organization
of investors, I have no position either on the need for
limitations on activities by nonpublic entities. Rather, we
view the issue of corporate political activities solely from
the lens of an investor organization that advocates corporate
governance best practices and shareowner rights.
Our long-standing policies reflect consensus among Council
members that political and charitable contributions by public
companies are important corporate governance matters warranting
robust board and shareowner oversight, comprehensive and
accessible public disclosure, and meaningful director
accountability.
Corporate governance at its most fundamental is about
ensuring that investors' capital is prudently used to create
long-term value. Heightened scrutiny is warranted any time
corporate executives may simply give away investors' money. The
Council acknowledges that to date, corporate political and
charitable contributions are generally immaterial in amount.
However, as Professor Coffee noted, given the potential for
conflicts, waste, and legal, reputational, and governance risks
that may arise from corporate political and charitable
contributions, enhanced oversight is particularly important.
The Council believes such oversight is best addressed by
directors and shareowners through a combined approach focused
on disclosure and board accountability. Thus, we believe
Congress should consider taking steps that would facilitate a
market-based, disclosure-focused approach to corporate
political and charitable activity. That approach should include
at least two elements:
First, requiring all public companies to disclose their
charitable and political contributions as well as their board's
policy for monitoring, assessing, and approving such spending.
To be useful to investors, those disclosures should include
amounts and recipients. They should also be readily accessible
through some electronic, widely-used format that facilitates
comparisons and other analyses.
Second, providing shareowners with meaningful tools to hold
directors accountable if they are disappointed with their
oversight of the corporation's charitable and political
activity. More specifically, all public companies should be
required to: first, have majority voting for the uncontested
election of directors; and second, provide long-term
shareowners the ability to include director's candidates on
management's proxy card. That's the so-called proxy access
reform.
I should note that the Securities and Exchange Commission
is considering a proposal addressing proxy access, and the
Council strongly supports this proposal. The Council also
commends the House for affirming the SEC's authority in this
area in the Wall Street Reform and Consumer Protection Act of
2009.
I agree transparency is the best disinfectant. However,
that's only half of the solution. Without basic reforms to the
director election process, shareowners simply will not have the
tools they need to hold directors and boards accountable for
their oversight performance, including their oversight of
political and charitable spending.
Before closing, I would like to note for the record that at
this time, the Council's policies do not address shareowner
approval of political and charitable contributions. Views are
mixed within the Council membership on this issue. Some members
strongly support such approval. Others have concerns,
particularly regarding the workability and effectiveness of
such a vote.
Thank you, Mr. Chairman, for inviting me to participate,
and I look forward to answering your questions.
[The prepared statement of Ms. Yerger can be found on page
86 of the appendix.]
Chairman Kanjorski. Thank you very much, Ms. Yerger. We
will now hear from Mr. J.W. Verret, assistant professor of law,
George Mason University School of Law.
Mr. Verret.
STATEMENT OF J.W. VERRET, ASSISTANT PROFESSOR OF LAW, GEORGE
MASON UNIVERSITY SCHOOL OF LAW
Mr. Verret. Chairman Kanjorski, Ranking Member Garrett, and
distinguished members of the committee, it's a privilege to
testify today. I thank you for the invitation. My name is J.W.
Verret. I am a professor of law at George Mason Law School, and
I am also a senior scholar in the Mercatus Center at George
Mason University, where I am a member of the Financial Markets
Working Group. I also direct the Corporate Federalism
Initiative, a network of scholars dedicated to studying the
intersection of State and Federal authority in corporate
governance.
The one group with the most to gain from H.R. 4537 and
other bills under consideration today, including H.R. 4537, the
Shareholders Protection Act of 2010, are large institutional
shareholders that have unique conflicts of interest. The group
that stands to suffer the most from much of the legislation
under consideration today are ordinary Main Street shareholders
who hold shares through their 401(k)s.
There are two types of shareholders in American publicly
traded companies. The first are retail investors or ordinary
Americans holding shares through retirement funds and 401(k)s.
Half of all American households own stocks in this way. The
other type of investor is the institutional investor, including
union pension funds as well as State pension funds run by
elected officials. H.R. 4537 and other legislation seeks to
give those institutional investors leverage over companies for
political purposes at the expense of retail investors. We have
seen numerous instances where institutional shareholders use
their leverage to achieve political goals, like CalPERS, the
California pension fund, and their insistence on environmental
or health policy changes that are paid in the end by ordinary
shareholders.
Today's legislation attempts to contort the securities laws
to regulate campaign finance. In doing so, it risks limiting
the ability of companies to communicate with legislators by
giving special interest institutional shareholders like unions
power to stop those communications. This bill does not limit
union political spending in any way, I might add. And it has
nothing to do with the investor protection goals of the
Securities Exchange Act, other than the fact that in the end of
the day, it actually harms those goals.
Shareholders have two available remedies if they become
dissatisfied with the performance of their companies: they can
sell the shares; or they can vote for an alternative nominee.
They do both with some frequency. In the rare event that
political advocacy results in corruption, there's a third line
of defense in place. If the audit committee of the board of
directors, which is independent of company management,
determines that donations are inappropriate, they are required
under the Foreign Corrupt Practices Act to stop them
immediately.
The structure of American corporate law rests the authority
to manage the day-to-day affairs of the company, including
decisions of how to invest the company's funds, with the board
of directors. Putting expenditures to a shareholder vote, like
the legislation today requires, is the first step toward
turning shareholder votes into town hall meetings.
Some shareholders may want the company to locate a new
factor in their town or give away health benefits for employees
without regard to whether those expenses risk bankrupting the
company. Shareholders choose the board of directors and
delegate authority to make those decisions to the board in
order to avoid that very problem.
Political risk poses a danger to the 401(k)s of ordinary
Americans more now than ever before. Leaders responsible for
policies that subsidized dangerous mortgage practices, for
instance, through Fannie Mae and Freddie Mac, now seek to
expand financial regulations to generate the appearance of
responsive action.
The Supreme Court recently affirmed that companies have a
constitutional right to advocate on behalf of their
shareholders. Corporations do so particularly to protect the
property rights of those shareholders from expenses associated
with regulations whose costs might exceed their benefits. Many
reputable companies spend money in this way. Berkshire
Hathaway, for example, one of the most highly regarded
companies in America, spent $3 million last year advocating for
the interests of the school and its shareholders.
Today's bill purports to redefine State corporate law, to
make unvoted expenditures a violation of the company's
fiduciary duty. This is a serious misunderstanding of the
structure of corporate law. As Justice Powell wrote, ``No
principle of corporate law is more firmly established than a
State's authority to regulate domestic corporations, including
the authority to define the voting rights of shareholders.''
The Shareholder Protection Act of 2010 has nothing to do
with reforming financial regulation in response to the
financial crisis, and indeed is a distraction from that vital
work. It risks giving powerful institutions such as pension
funds and State-elected treasurers dangerous leverage over the
retirement savings of ordinary Americans. To call H.R. 4537 a
Shareholder Protection Act is fundamentally misleading.
Thank you for the opportunity to testify, and I look
forward to answering your questions.
[The prepared statement of Professor Verret can be found on
page 84 of the appendix.]
Chairman Kanjorski. And next, we have Ms. Nell Minow,
editor and co-founder of The Corporate Library. Ms. Minow, I
understand you are the daughter of Newton Minow. Is that--
Ms. Minow. Yes, I am.
Chairman Kanjorski. Oh, congratulations. He is quite a
famous fellow.
Ms. Minow. He's also the world's best father.
Chairman Kanjorski. Great.
STATEMENT OF NELL MINOW, EDITOR AND CO-FOUNDER, THE CORPORATE
LIBRARY
Ms. Minow. Thank you very much, Mr. Chairman, and members
of the committee. It's an honor to be back in this room to talk
with you about one of my favorite subjects, corporate
governance.
I want to associate myself with the remarks of the first
three panelists in particular, and so I'm not going to
reiterate their points. I'm just going to move over them
quickly so that we can get to the question part. But I think we
can all agree that the bedrock principle here in the United
States is freedom of speech. We're all in favor of freedom of
speech. We're all in favor of the marketplace of ideas and of
allowing even bad ideas in and countering them with better
ideas, but we cannot let the marketplace of ideas be tainted by
that other marketplace, the one that involves actual money. And
I think that is what's happening here.
I'm a little surprised by Professor Verret, aside from the
fact that he's factually wrong on a number of his assertions.
401(k) investors, for example, invest largely through
institutional investors and don't do individual stock picks.
But I'm a little surprised because I thought that he understood
that markets run on information. And what we're really about
here is getting that information out there.
The conflict of interest is not at the shareholder level;
it's definitely at the executive level. Executives are the ones
who spend corporate money hiding it through intermediaries to
influence the political outcomes in a way that is even contrary
to their expressed views. We need to clean that up.
If in fact, as the Court says, corporations are assemblages
of individuals with First Amendment rights, let's make sure
that the corporate positions reflect the views of those
individuals. I really particularly object to his point that
apparently shareholders are smart enough to buy the stock and
to sell the stock but they're not smart enough to vote the
stock intelligently. I think the whole idea of shareholder
rights is that shareholders will in aggregate make the right
decision, and when they don't, they bear the consequences.
That's what markets are all about.
So the problem, as always under a capitalist system, is
agency costs. How do we give corporate managers enough
authority to run the company in a way that is sustainable over
the long term without giving them so much that they appropriate
corporate funds for their own ends? The secret is, of course,
better disclosure. If we had a better idea of what they were
doing, then perhaps I would be able to tell you exactly how
much money the insurance industry is spending to stop health
care reform instead of saying it's between $10 million and $20
million. I don't know. How do I not know? Because it's not
disclosed. Problem number one is the lack of disclosure to the
current and potential investors in the company.
Problem number two, as Ann Yerger said, is that even if
shareholders know how their money is being spent and what
positions it's being used to support, there's no way for them
to respond effectively to provide necessary direction. I always
love explaining to people who know better than anyone else in
the world what an election means in the corporate world: no one
runs against you; and management nominates the candidates and
counts the votes. Not only that, but if you only get one vote,
you get elected. We currently have over 80 directors serving
even though a majority of the shareholders voted against them.
We have to have a better system than that. We must require
majority vote and give shareholders access to the proxy to run
their own candidates.
The third problem, and the one I really want to focus on,
is the problem of intermediaries. It's not enough that
corporations must disclose every penny that they spend on
political contributions, lobbying, ads, etc. We have to get
them to disclose what they funnel through intermediaries,
whether it is the Chamber of Commerce, which has been
completely co-opted by the executives to the detriment of
business, or these fake groups that are called something like
``Citizens for a Better Tomorrow.''
The Chamber of Commerce, which recently was found to have
overstated its membership by 900 percent, has been particularly
susceptible to this kind of manipulation. They now have of
course only 300,000 members, not the 3 million they had
previously trumpeted, but their tax filings show that just 19
donors contributed one-third of their income. We need to find
out where that money is coming from and where it is going and
who it benefits.
The fourth problem, and this is the one that I think is
most important, is once shareholders have the information, do
they have the right and the opportunity and the obligation to
act on it? Shareholders, institutional shareholders of course
are fiduciaries, the strictest standard under our legal system.
I think that's intended to address the conflicts of interest
that may exist that Professor Verret refers to, but we need to
make sure. I would really love to see this committee call in
Fidelity, Vanguard, etc., and ask them: ``How do you vote on
these issues? What do you look for? Why aren't you doing a
better job?''
Finally, the fifth problem is that political elections, as
you know, are too expensive in this country. I think we need to
work on that side of it, too. I urge the members of the
committee to give careful consideration to the Fair Elections
Act and to making free television time available. Because
frankly, if that was available, politics would not be so
expensive and we wouldn't have this problem to begin with.
Thank you again for allowing me to comment, and I look
forward to your questions.
[The prepared statement of Ms. Minow can be found on page
72 of the appendix.]
Chairman Kanjorski. Thank you very much, Ms. Minow. Next,
we will have Professor Michael Klausner, Nancy and Charles
Munger Professor of Business and Professor of Law, Stanford Law
School.
Professor Klausner.
STATEMENT OF MICHAEL KLAUSNER, NANCY AND CHARLES MUNGER
PROFESSOR OF BUSINESS AND PROFESSOR OF LAW, STANFORD LAW SCHOOL
Mr. Klausner. Thank you, Chairman Kanjorski, and members of
the committee. I too agree with much of what the first three
speakers said, and Ms. Minow as well, so I'll be brief. In
Citizens United, the Supreme Court recognized that its decision
left open the question of how the corporate governance regime
would address political advocacy by corporations. The Court
suggested that concern over management control of political
expenditures could be ``corrected by shareholders through the
procedures of corporate democracy.'' The Court further stated
that ``the remedy is not to restrict speech but to consider and
explore other regulatory mechanisms.'' So that's what we're
doing today.
The threshold question is, what can shareholders do under
the current governance regime if they would like to influence
management's use of corporate funds for political activities?
And the answer is, not much. The only potential tool available
to shareholders, as Professor Verret said, is their right to
vote annually for nominees to the board of directors. That
mechanism, however, is poorly designed for the purposes of
controlling political expenditures. It doesn't allow
shareholders to exert any sort of advanced power, nor does it
allow shareholders to vote out boards of directors, as Ms.
Minow said. So the vote for nominees to the board is not going
to be effective in this realm, in my view.
The other potential response, also referred to by Professor
Verret, is that shareholders can sell their shares. That
response, however, won't influence management's political
expenditures, and in fact, it barely amounts to self-
expression. Management won't even know the shares have been
sold. They will be bought by other investors who don't know of
or aren't bothered by the political expenditures. Unless the
political expenditure is significantly bad for business, there
will be no effect on the company's share price and therefore no
influence on management before or after the fact of their
political expenditure.
Now if a political expenditure is materially bad for
business, then the share price will decline as a result of
normal share trading, regardless of whether they are
politically motivated stock sales. So in sum, the current
system of voting for boards of directors and selling shares
isn't really a response to the political expenditure question.
The basic problem is that the current system is not
designed to give shareholders a direct voice in management
decisionmaking, nor should it be. The assumption of the system
is, first, that shareholders essentially have uniform interests
in having management maximize the return on their investment.
And second, that shareholders lack the expertise to manage the
company. These are valid assumptions in the context of business
decisions. But they don't apply in the context of political
expenditures. Shareholders are not uniform in their political
views, and there is no reason to defer to management on this
dimension.
Now the fact that shareholders lack effective means of
controlling political expenditures doesn't mean that they will
do nothing. To the contrary, they could well decide, and I
expect they would, to use the annual vote for board nominees as
a mean of expressing dissatisfaction, even if doing so will not
result in displacing the board. This use of the shareholder
vote would undermine the signal that vote could send with
respect to the quality of management and its business
decisions. I therefore think not only is the shareholder vote
inadequate, but it actually is a poor vehicle through which to
try to control political expenditures.
So what do I think this committee should consider? I
propose the following. That corporations be required to let
shareholders vote annually on whether they want their company
to exercise the rights Citizens United gave to them. Managers
who seek shareholder approval of political expenditures would
use this opportunity to explain the expenditures they intend to
make, how those expenditures would be in the shareholders'
interest, and what the cost would be. It need not be a line
item disclosure, just a description of the types of
expenditures management anticipates. The vote would be separate
from the vote for board nominees. Therefore, shareholders would
be able to express their views on politics separately from
their views on how well management is doing at running the
company.
The mechanism isn't perfect, but I think it's an
improvement over what we have, now that Citizens United has
been decided. Thank you, and I look forward to your questions.
[The prepared statement of Professor Klausner can be found
on page 65 of the appendix.]
Chairman Kanjorski. Thank you, professor.
And finally, we will hear from Mr. Jan Baran, partner,
Wiley Rein.
Mr. Baran.
STATEMENT OF JAN BARAN, PARTNER, WILEY REIN LLP
Mr. Baran. Thank you, Mr. Chairman, and thank you for your
excellent Polish pronunciation of my name.
My name is Jan Baran. I am a partner at the Washington,
D.C. law firm of Wiley Rein LLP, and I head the firm's Election
Law and Government Ethics Group. I am here today in a purely
personal capacity, even though I was involved in the Citizens
United case through the submission of an amicus brief. I am not
representing any party to that case or any client of my firm.
I would like to touch on three subjects in summarizing my
prepared comments which were submitted to the subcommittee:
first, I would like to just spend a moment to make sure we
understand the scope of what the Supreme Court did; second, I
wish to comment on some of the constitutional ramifications of
that decision in the context of what you're considering here in
this subcommittee; and third, I want to touch on some practical
concerns I would have that I'm sure you will want to keep in
mind when you undertake your legislative drafting.
In terms of the Citizens United case, the technical
conclusion of the Court was that the First Amendment does not
allow Congress to prohibit corporations, and presumably unions,
with respect to the content of certain public advertising. That
content involves what is called express advocacy or
electioneering communications. Until the decision, Federal law
and the law in approximately 24 States prohibited corporations
from financing public advertising that says ``vote for'' or
``vote against'' a named candidate.
Up until the Citizens United case, there were many other
forms of corporate financed advertising, including political
advertising, that were permitted, and in fact protected under
the First Amendment, including so-called issue advertising,
discussion of public officials with respect to public issues
and legislation. In fact, 2 days before the Citizens United
case, there was a special election in the Commonwealth of
Massachusetts, and in that election, which predated Citizens
United under then-existing law, there was approximately $4.5
million in advertising financed by corporations and unions and
other groups with respect to that election.
So the technical consequence of Citizens United is that
corporations can now be unburdened with any content regulation
as to what they say independently of any candidate or political
party, and they can do so at any time. They cannot be limited
in their pre-election communications to the public.
Having made that conclusion, this subcommittee and Congress
has a challenge of addressing what forms of regulations it may
want to implement in light of Citizens United. Obviously, I
have heard a great deal of discussion today about corporate
governance and corporate law principles, which is what I assume
is the typical jurisdiction of this committee. But when you
legislate now, you are legislating in an area of First
Amendment rights, and you don't have as free a hand, assuming
you did before.
One of the principles in First Amendment jurisprudence is
that political speakers must be treated equally. This has been
evidenced in numerous Supreme Court cases involving, for
example, First Amendment exercise of picketing and other forms
of expression. There were laws in Illinois at one time that
prohibited certain types of picketing except by labor unions.
The Supreme Court in the Mosley case said, well, there's no
reason to distinguish between these types of activities,
between unions and corporations and other organizations. And
just last month, the Colorado Supreme Court struck down a State
law that imposed contribution prohibitions and limitations on
labor unions if they had a contract with the State but did not
do so with respect to private corporations or other types of
entities that had government contracts. The reason that the
court struck it down is that in these types of cases the
government has an obligation when questioned in court to come
forward and explain why different speakers, different
participants in the political process exercising First
Amendment rights are being treated differently. And you have to
demonstrate a compelling governmental interest in justifying
the disparate treatment.
So how does that affect you and this legislative issue that
you are addressing? Well, if you are going to require
shareholder voting because you want to have the participants in
a corporation make this type of decision, why will that not be
true of other speakers spending money, including labor unions?
Will their members now approve any expense over $10,000? And
what about other types of incorporated entities such as trade
associations? Will a trade association require the vote of its
members before it spends more than $10,000? What about groups
like the National Rifle Association or the Sierra Club? If
they're not going to be required to ``approve'' this type of an
expense, what is the reason that you are requiring business
corporations to do that?
There are also other types of discriminatory effects that
you will have to be mindful of. I know that Congressman
Capuano's proposed legislation as currently drafted--I have not
seen any of your revisions, sir--requires shareholder votes for
expenses over $10,000, except for media corporations. There's
an exception for media corporations. So there has to be an
explanation. Why are we treating public media corporations
differently than other types of public corporations? That
presents a big problem, because the Supreme Court in Citizens
United noted the discrepancy of treatment of public media
corporations and said that really wasn't fair. All corporations
should have the same rights that media corporations have. In
practical terms, some media corporations are actually
subsidized by subsidiaries that aren't media corporations. I'm
thinking of The Washington Post Company. The newspaper is a
money-losing proposition. But the company is quite profitable,
mainly because of Kaplan Educational Services. So one can say
that's a media company, but in fact it's being subsidized by
non-media corporate activity.
Finally, as noted in my written testimony, you will have to
confront some very practical implications in anything that you
propose, including proposals by other committees or other
legislation that may not be handled here. For example, I note
the question of what's going to happen to foreign corporations?
There is a suggestion elsewhere to treat corporations that are
more than 20 percent owned by foreign nationals, however that's
defined, to be a foreign company, and therefore, they cannot
make any expenditures. That proposal presents some unique
issues, but it also runs into some of the things you're
considering. If you require public corporations to have a vote
of stockholders, what does that mean for a foreigner who owns
stock in one of these corporations? Are you requiring them to
vote on this, or are you going to prohibit them from voting on
these types of issues because, after all, they're foreigners.
Separately, there's the issue of, well, what does make a
company foreign, 20 percent stock ownership? What about a
company whose revenues from foreign sales well exceeds 20
percent of all its revenues? That's foreign money coming in
here to a corporation. Does that make that corporation
``foreign'' in the sense that it is now benefitting from
foreign financing, which theoretically could be used here in
the United States for political expression?
Thank you for this opportunity and I look forward to your
questions.
[The prepared statement of Mr. Baran can be found on page
33 of the appendix.]
Chairman Kanjorski. Thank you very much, Mr. Baran. I will
take my few moments and then we will hear from the experts in
the committee. First of all, it strikes me that we should be
considering a resolution to establish the United Corporations
of America, because is that not the path we are really going
down? We are trying to make corporations and other entities
like that so human as to be true, complete citizens of the
United States.
You know, that sounds far fetched, but I am not sure we are
not running down a path that will not become very popular in a
short period of time to call for and convene another
Constitutional Convention in the United States to reexamine the
First Amendment and the rights attendant thereto. And I think
we were on that track ever since Sullivan v. New York Times, to
tell you the truth, and that whole course of conduct that we
are in. And it somewhat frightens me. Just to take it out of
the realm of humor in terms of establishing a Constitutional
Convention, maybe that should be serious.
But, you know, in Pennsylvania at the turn of the century,
we had a very unique thing. The three industries of
Pennsylvania--the railroad, the steel industry and the mining
industry--actually had reserved seats in the State Senate of
Pennsylvania so that they could participate right on the Floor
with the Senators so they would not get too far away from the
intended principles of capital. And it always struck me that is
about as far as the country and certainly Pennsylvania had
gone, and then we swung back to the progressive era of
Roosevelt and changed some of those things, but we seem to be
on that same course right now.
We ran across this incidentally, in this committee most
recently of how to get our arms around rating agencies with
their constitutional protection under the First Amendment and
what do you do and what the effect is and how do you regulate
them. I am not at all sure that if I had my d'ruthers, I would
view the First Amendment to the Constitution in terms of free
speech as not being corporate free speech. That if you want the
protection of free speech, be a single entity. Once you start
getting in a conglomerate, you should lose those rights. But we
have lost that battle. Now we are into corporations. And I
happen to agree with you, Professor, if 21 percent of a
corporation is ``foreignly'' owned as compared to 19 percent,
and who should participate.
I am more worried about the amount of monies involved and
the effect of that money on elections. Having participated in
13 or 14 primary and general elections in my term in Congress,
I have seen what money can do in campaigns, and it seems to
pollute them every year more and more. And sometimes humorously
on the Floor, we comment that really it would be much better if
everybody just announced that they were no longer going to take
a salary or take an office allowance, but that they would have
their sponsors pick that up and you could go to your
constituents and say, I'm not costing you anything to cast your
representative vote in Congress because I represent United
States Steel, and they pay my salary and they pay--and
everybody go out and get their corporate sponsor. And I am sure
some segment of the American population may think that is a
great cost savings. I hope not, but I am afraid that may be the
truth.
Where do you see this--and maybe I will start with you,
Professor Coffee, where do you see this all to be heading? I
know your presentation got us to how to handle immediately
using the governance provisions. But do you think we ought to
go beyond that in addressing this issue and think about going
to the basis of the Constitution itself and whether or not we
lost control of that definition?
Mr. Coffee. I would hesitate to encourage anyone to convene
a Constitutional Convention. There are so many different issues
here. The rating agencies are one issue. The courts can still
handle that. There is this area where we're told corporations
have speech, but the Supreme Court is also telling us that
shareholders have full control over limiting, curbing, and
focusing that speech. And I think that should play out for a
bit. I think you should think about a range of options for
shareholders, whether it's an annual vote, whether it's bylaw
votes, whether it's referendums, giving them all the possible
mechanisms to control their own organization. I think that's
the least drastic means. And I would suggest we approach this
by looking for the least restrictive alternative, and I think
that's enabling self-regulation.
If self-regulation fails, and we may decide that in 4 or 5
years, then we can come to the Constitutional Convention. But
I'm not sure that we have the same people that we had when
Madison, Hamilton, and the Founding Fathers were putting this
together, and I think that this would be also intensely
lobbied. So I would first give the chance for self-regulation
to work by empowering shareholders and by prodding the SEC, of
which I'm a great admirer, but they're very busy. And they need
to respond to this new revolution.
Citizens United is a revolution, and they have to think
about how they should reform and revise their own disclosure
medium to give shareholders more information. Only then will
voting work. Voting works when there's full information. So I'm
suggesting self-regulation first and maybe ultimately you'll be
right and we have to have this convention, but I wouldn't rush
there.
Chairman Kanjorski. No, I am afraid--I agree with you in
terms of we probably would lose a good portion of the Bill of
Rights if we convened a convention. The price would be
extraordinary. But it looks like we are headed down that path.
Do any of you as Constitution scholars see, has the Court gone
to its extreme with this thought process, or are they going to
go beyond this and continue to go beyond this and just push us
to a corporate society?
Mr. Coffee. I think it depends a lot on who is on the
Court.
Chairman Kanjorski. Well, I--
Mr. Coffee. --we're going to have a transition, it's
coming. I would think that the Court has taken a strong
position but it has also left open a lot of room for self-
regulation and for regulation that enhances the power of
shareholders to curb and control the corporation. And I think
that's the area that can be most exploited in the short run.
Chairman Kanjorski. How do you handle Mr. Baran's problem
with the ownership problem?
Mr. Coffee. You know, I did hear--Mr. Baran and Mr. Verret,
and they different views, but they were somewhat similar. I
don't believe there's a fundamental conflict here between
institutional investors and retail shareholders. There may be
in some other areas like securities litigation, but I don't
think there is here. In terms of Mr. Baran's problem about
foreign shareholders, I don't think there's any danger about
this bill being underinclusive because it covers only publicly
held corporations. That's where we have the problem of
disbursed ownership, where there are tens of thousands of
shareholders and management that is effectively immune from
shareholder control.
When you look at privately held corporations, there are
powerful shareholders there, and they can find their own ways
to control managers. So I would start with the publicly held
corporation where Congress has always directed the securities
laws at the publicly held corporation. And I don't think there
is any danger of a statute being found unconstitutional because
it's underinclusive. Obviously, you want to comment.
Chairman Kanjorski. How do you handle the hidden ownership
question of whether the ownership is in trusts or other devices
that really do not readily disclose who the owners are? How do
we know that in fact China is not a participant in a trust held
in one of our major banks?
Mr. Coffee. I think you can't handle every problem at the
first crack of the bat. It could well be that there are
conflicts that you will find among institutional investors, but
institutional investors probably own over 70 percent of our
largest companies. And if we feel that there are conflicts
there influencing their voting, Congress can come back and give
the beneficiaries greater control over the institutions. But I
would start with the manageable problem of giving the
shareholders of the company a greater say in this process.
Because right now, they don't know what's going on.
Chairman Kanjorski. Mr. Castle, I exceeded my time and I am
going to get to your questions.
Mr. Castle. Thank you, Mr. Chairman. Mr. Baran, you stated
in your testimony, and I think I wrote it down, I think you
said that this case applies to corporations. I think you said
presumably unions too. I have not read it, and I'm not an
expert on it anyhow, but does anyone disagree here on the panel
that it applies to unions as well as to corporations? Mr.
Sandstrom?
Mr. Sandstrom. Mr. Castle, I think the regulator, the
Federal Election Commission, has determined how it's going to
enforce the law, and it's going to enforce the law in the same
way against labor unions as corporations. The labor unions will
be free to make independent expenditures from labor funds.
Mr. Castle. I don't know if this hearing is about just Mr.
Capuano's bill or not, but it has been referred to, and it
refers to shareholder protection and deals with just
corporations. Would you not agree that we need to deal with the
union issue as well?
Mr. Sandstrom. I think the union issue is somewhat
different. First, with respect to disclosure, one of the
problems in the corporate area is most of the money is not
disclosed. Most of the money unions use in politics is
disclosed. Second, I don't think anybody, even Mr. Capuano's
bill, is looking that the beneficial shareholders actually have
a vote. But when you have a large number of institutional
shareholders and others who are representing the interests of
those beneficial shareholders, the millions of Americans out
there who hold stock beneficially, that they should have--be
required to act in this area.
Mr. Castle. I'm not sure I agree with you. The mere fact
it's disclosed may not be sufficient. Should the various union
members be given the right to vote on whether or not the actual
expenditures are being made? Why wouldn't the same rules apply?
There are different circumstances of stockholders and union
members, but why wouldn't the same rules apply?
Mr. Sandstrom. I think the issue would be how to define
those rules, who would have--
Mr. Castle. I agree with that.
Mr. Sandstrom. --to vote on.
Ms. Minow. May I respond to that, please? There are several
differences, but the main difference is that, as I discussed in
my testimony, we do not have a robust system for electing
corporate directors. We do have a very robust system for
electing representatives in these other kinds of entities. I'm
not saying that we shouldn't have rules that apply to them and
disclosure rules, but the fact is that union members can
actually change their management if they don't like the
political positions that they're taking. I'm open to the idea--
Mr. Castle. Let me interrupt you. They can't change their--
I mean, you can change a board of directors, too. They can't
change their officials that easily.
Ms. Minow. Actually, you can't change the board of
directors.
Mr. Castle. They could change them--
Ms. Minow. That's my point. Eighty directors are currently
serving on public companies in this country, even though a
majority of the shareholders voted against them. It's almost
impossible. It's less than a fraction of 1 percent of the cases
where--
Mr. Castle. That doesn't make your earlier statement
correct, though. Your earlier statement was that they could
change their--the people running the union. They can't do that
until there's an election or something of that nature.
Ms. Minow. Until there's an election. But then they can.
But they actually can when that happens. There are also
several--you know, they're different, they're different kind of
entities, they're organized differently. I'm not saying that
that shouldn't be addressed, but we should understand their
differences as we address them.
Mr. Castle. Okay.
Mr. Verret. Representative Castle, if I could add to that
as well, and just in counter to the view that elections aren't
contested for boards of directors. Last year, at 59 companies,
dissidents were victorious in contested elections, dissidents
against the incumbents.
Mr. Castle. Thank you.
Ms. Minow. Again, I did say a fraction of one percent, and
that is a fraction of one percent.
Mr. Castle. Thank you. Professor Verret, you indicated that
the--who has the most to gain by all this is the large
institutional stockholders and the ordinary retail investors
might have the least to gain. I'm a little bit concerned about
that as well. I mean, in a broad--talking about the corporate
structures now, in a broad sense, in that you may have
somebody, anyone who owns 100 shares of something and then you
have those who own 20,000 shares of something or whatever it
may be, and who's really going to benefit from this and who is
not in terms of making decisions. Can you expand on that a
little bit?
Mr. Verret. Yes. I would offer that retail shareholders who
own mostly through 401(k)s, whether through mutual funds or
indirectly in shares, don't have the time to vote their shares
the way that a union pension fund would or the way that a State
pension fund would. They don't have the incentive to do so the
way that those large institutions do, and they don't have the
time and the resources. But we have seen some political
conflicts of interest from some of the large institutional
shareholders.
For instance, Mr. Angelides, when he was treasurer of the
State of California, a very dedicated public servant, but
certainly a political figure, as everybody would agree, said
look, CalPERS has very strong policies about environmental
regulation and about health care, and we're going to use our
shareholder power to see those through, policies we can't get
through Washington, we're going to use our shareholder powers
to get them. Now those might be very important issues, but I
would take issue with the fact, with the instance of using
Federal securities laws and using ownership in companies to
deal with those policy issues. Because I don't think ordinary
investors through their 401(k)s want to pay for that.
Ms. Yerger. But if I may just clarify, ordinary investors
who are indeed generally investing through 401(k)s are
investing through mutual fund companies, institutional
investors, who have a fiduciary duty to vote on behalf of those
individuals. So those individuals don't even have the right to
vote those shares. But the mutual fund company does have the
right and the responsibility. And those votes, I might add, are
publicly disclosed. So I actually strongly disagree with your
assertion there.
Mr. Verret. I don't disagree with respect to mutual funds.
In fact, my concern is not really with mutual funds today. It's
more with the institutions that have demonstrated political
interests.
Ms. Yerger. But they are indeed a minority of the
institutional owners.
Ms. Minow. And I disagree with your characterization of
those interests as political interests. Are you saying that
there is no legitimate interest of a fiduciary investor in the
environmental policies of the portfolio companies? Of course
it's a completely legitimate interest, and you're making a
completely false dichotomy.
Mr. Verret. I'm suggesting that fiduciary law is not
sufficient to deal with these conflicts of interest with
respect to State pension funds and union pension funds. Yes, I
am suggesting that.
Mr. Klausner. Can I just clarify one thing?
Mr. Castle. Wait a minute. Mr. Chairman, how are we doing
time-wise here?
Chairman Kanjorski. We are down to about 2\1/2\ minutes.
Mr. Castle. On the vote?
Chairman Kanjorski. Yes.
Mr. Castle. On the Floor. I think we're going to have to
suspend at this point. I yield back.
Chairman Kanjorski. If I may call the attention of the
panel, Professor Klausner and Mr. Baran have a conflict that
require them to leave by 12:30. We are faced with six votes now
on the Floor, and that would necessitate us being away until
about 12:30. We will return. We ask the rest of the panel to
remain until that time, and the next examiner will be Mr.
Capuano of Massachusetts. We are going to recess now, and you
will be first up. And if you are first back, take the chair,
start and convene.
Mr. Capuano. Okay.
Chairman Kanjorski. This committee will stand in recess.
[recess]
Mr. Capuano. [presiding] I would be very interested in your
comments after you get a chance to look at it. But I think, I'm
not sure, that it addresses most of the concerns. I mean, even
the original bill, I just--the idea was to try to do something
we think is legal and constitutional without overstepping the
bounds. Who knows where the bounds are. The courts will make
that determination in some future time. But the concept is not
to make it so onerous as to be de facto prohibition.
So what we have done is we'll change it from a--the
original proposal was every time there's an expenditure over
$10,000, it would be a one-time annual vote followed by a
disclosure by the board of directors any time they vote to
spend more than $50,000, not an additional vote of the
shareholders, but simply a notification online, and then in the
quarterly report to shareholders that this is what we have
done, and the annual shareholder vote would be to set a limit
to say you can spend up to ``X'' dollars, whatever that might
be.
It would be a separate vote that's required, and we did not
try to take on--one of the reasons this bill is what it is,
including some of the union issues, I think some of the union
questions are fair questions--is that I tried to draft this
bill in the jurisdiction of this committee.
These other issues go to other committees, and you all know
that there are other bills pending at the moment to address
some of the other concerns, including some of the greater
corporate concerns which I think are legitimate as well. And
though Mr. Baran is gone, I just want to make sure he knows
that we did take out that specific language relative to media
corporations because it's not necessary as we understand it
now.
But that's the basic idea. And I want to be really clear.
The whole concept of this bill is to try to thread the needle,
to say what can we do without being overly burdensome, but also
asking, whose money is it? And in this situation, it is clearly
and unequivocally the shareholders' money. And honestly, one of
the things we did, I want to be clear, is that there was some
debate as to how we could get to each individual shareholder so
as to not disadvantage one shareholder over another, we
couldn't figure out a way to get to the people represented by
proxies without creating a system that was so burdensome that I
think that a court probably would have ruled it so and said it
was a de facto prohibition.
So we let the proxies do it as long as they report to the
people that they are voting on in their behalf. And again, if
somebody has a suggestion as to how we could do it, I totally
agree I would prefer a situation where each individual
shareholder could cast that vote. We couldn't come up with a
way that would do it that we thought would stand the test of
the Constitution.
But I want to be clear. I don't know and I'm not all that
fearful of most corporations doing, and if I had my d'ruthers,
and everybody has different goals and motivations, my
motivation in a perfect world would be to get everybody out of
the electoral process except those of us who have our names on
the ballot. Everybody else should be out of it. I can't do it,
you know, that's the way it is, but I would have not just no
corporate money, no union money, no 527s, no D triple C, no
nobody, if I had my d'ruthers. Just me, my opponents, and the
voters. I can't get there, at least if you can help me get
there, I would be more than happy to listen, but absent that,
the next best thing I can do is at least allow the voters to
know who is saying what about who.
And I have, under that situation, I have no serious
concerns. If Exxon Corporation wants to take out an ad that
says I'm good, bad or indifferent, I don't like and I actually
would love to find a way to get away from the Citizens for a
Better World saying Mike Capuano stinks, you know, who are
they? And we're trying to do that in other bills. The whole
idea is the battle over ideas and philosophies should be
between the voters and the people that they are electing. And
others should either stay out or put their name on the ballot
or at least, at the very least, let the voters know who they
are as they speak. And that's for both sides.
And at the moment, as I understand it, the entire money
spent on Federal elections in 2008 was in the $5 billion range.
That's every penny that was spent by every Federal candidate,
both themselves and D triple C, the RNCC and all the others
that play in these games. The problem is, up until now, without
the general treasuries of these corporations being involved,
okay, we know the universe, you know, the impact is minimal
even if there was--I think it was Mr. Baran who said there was
something like $4 million spent in the Massachusetts election.
Well, that's out of about $30 million that was spent on that
whole election.
The problem is the Exxon Corporation is just one
corporation, made a profit of $45 billion in the same year that
the total spent on elections was $5 billion. They could take 10
percent of their profit, not their operating expenses, of just
their profit, and equal every penny spent in every election
across the country and clearly have a serious voice. Okay. We
can't stop that. I got it. But we can certainly let people know
where it comes from.
So actually, I have heard several ideas here today that I
do want to follow up with several of you on specific comments,
because, you know, I am open to anything and even Professor
Verret. I don't agree with some of your philosophical views,
that's fair. But honestly, I am more than open to try to find a
way. I'm not trying to stick it to anybody. I'm trying to do
just the opposite. And I fully suspect we will come up with a
different philosophical viewpoint, but that doesn't mean you
can't help us find a way to at least better impose a philosophy
that you don't agree with. And I would ask that you do so.
So I would ask that you read the new bill, and I would ask
that you look at it in that way. And again, if there's a more
perfect way to do it, I want to hear it. And I am involved with
some of the other bills that are being written for other
committees, and I will tell you that these are not easy things
to do. You know that. And if there are suggestions as we go
along as to how to do it, please, you guys are the experts
here. Help us do it, even if you don't agree with us.
And so that honestly--I don't have questions, but I will
tell you that we will be calling on you and I really do ask
that you read the bill and take a look at it, and again, give
us your viewpoint, and, you know, the philosophical viewpoints
sounds like I'll agree with some. Professor, I presume we won't
agree. But that's okay. That's what we do here. I still would
like to have your input on the details if you find a detail you
think that we could change, I'm not only open, I encourage you
to do it.
Mr. Verret. You got it.
Mr. Capuano. Thank you. With that, I really don't have
questions per se. Oh, yes, right. I have something here from
the Brennan Center that they have asked that we submit in the
official record. And with your permission, Mr. Chairman, we
will do that.
Chairman Kanjorski. Without objection, it is so ordered.
Mr. Capuano. They are a well respected organization with
some interesting thoughts. And with that, I think, again, I
apologize for holding you here, but you guys know the system
and thank you very much. Thank you, Mr. Chairman.
Chairman Kanjorski. Thank you very much, Mr. Capuano.
Do any other members seek recognition?
Okay. I apologize for the lack of good scheduling in the
House. But there are a lot of things happening that required us
to remain there and now return with several other votes. But we
appreciate your input, certainly your testimony, and we look
forward to having your expertise available as we start down
this road.
One of the thoughts, if you could give some thought to it,
is many of you may be familiar with the Landrum-Griffith Act as
it guarantees democratic processes for labor unions. I do not
think we have a comparable act regarding corporations, and it
may be an interesting time since corporations are going to be
taking part in the political process that we may find a
corollary type of act requiring corporations to have democratic
principles apply and methodologies of enforcing the same. When
I was in private practice before my election to Congress, I was
fortunate to have the first damage case against one of our
national unions under the Landrum-Griffith Act. And their
denial of democratic practices after that recovery, which was
substantial, changed the course of how unions operated. Maybe
we could apply the same principles to corporations in order to
provide democratic principles in how they act and whatever we
do in terms of their activities, and that will be perhaps a
good enforcement mechanism. But if you would think about it and
analyze it as we go through this process.
Now without any further ado, the Chair notes that some
members may have additional questions for this panel which they
may wish to submit in writing. Without objection, the hearing
record will remain open for 30 days for members to submit
written questions to these witnesses and to place their
responses in the record.
Before we adjourn, the following will be made part of the
record of this hearing, the written statement of Lisa Gilbert,
United States Public Interest Research Group, and without
objection, we will enter the polling that was offered earlier,
which I had not entered into the record. Now let it be noted
that without any objection, that polling will be attached to
the witness' testimony and entered into the record.
Without any objection, it is so ordered. The panel is
dismissed, and this hearing is adjourned.
[Whereupon, at 1:30 p.m., the hearing was adjourned.]
A P P E N D I X
March 11, 2010
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