February 1, 2019

Political Spending: Strine Says Asset Managers Must Fix “Fiduciary Blind Spot”

Whether he’s slamming financially engineered deals that leave employees holding the bag, calling out activist hedge funds, or skewering litigants with his caustic wit, Delaware’s Chief Justice Leo Strine never hesitates to “call ’em as he sees ’em” – and his recent essay bashing corporate political spending is no exception.

Strine’s essay calls into question the legitimacy of corporate political spending and says that the “Big 4” asset managers – BlackRock, Vanguard, State Street & Fidelity – have dropped the ball when it comes to their oversight responsibilities. He points out that the Big 4 are responsible for the investments of millions of American workers who have become “forced capitalists” in order to fund their retirement & their children’s education, and says that a docile approach when it comes to corporate political spending isn’t consistent with their obligations to these “Worker Investors.”

The Chief Justice doesn’t mince words when it comes to expressing his displeasure with this state of affairs:

The Big 4 continue to have a fiduciary blind spot: they let corporate management spend the Worker Investors’ entrusted capital for political purposes without constraint. The Big 4 abdicate in the area of political spending because they know that they do not have Worker Investors’ capital for political reasons and because the funds do not have legitimacy to speak for them politically. But mutual funds do not invest in public companies for political reasons, and public company management has no legitimacy to use corporate funds for political expression either. Thus, a “double legitimacy” problem infects corporate political spending.

The Chief Justice says that the Big 4 should push companies to implement a requirement that any corporate political spending to be authorized by a supermajority vote of the shareholders. He notes that this idea came from Vanguard founder Jack Bogle in the wake of Citizens United, and contends that this action is necessary if the Big 4 are to adequately represent the interests of Worker Investors:

It is not asking too much of the Big 4 to make sure that Worker Investors’ trapped capital is not used to tilt the playing field even more against ordinary, human Americans, to subject them to the huge costs that come when corporations influence regulatory policies to take shortcuts that hurt workers, consumers and the environment, and to shift the focus of corporate management away from legitimate, productive ways to generate sustainable wealth and toward
rent-seeking. By abdicating their duty to police political spending, the Big 4 has, in effect, enabled corporations to use Worker Investors’ capital for these purposes.

Investigations: Lookout, Here Comes Congress!

Speaking of politics, I think I read somewhere that Congress has broad investigative authority – and when it comes to investigations, this Paul Weiss memo says that companies shouldn’t ask for whom the bell tolls – because this year, it’s tolling for them:

Given the pent-up demand for House Democrats to make robust use of their oversight and investigative authorities, the current relative lull in congressional investigations of corporations is expected to end. Corporations across sectors should anticipate an uptick in investigative activity.

In addition to holding the majority for the first time in nearly a decade, this will be the first time that Democrats control the House since a 2015 rule change that empowered a number of committe chairs to subpoena witnesses or documents unilaterally. The chairs of the following committees, among others, have this authority: Energy and Commerce; Financial Services; Intelligence; Judiciary; Natural Resources; and Oversight and Government Reform.

The memo cautions that companies with ties to the Trump Administration or that have benefitted significantly from its initiatives may find themselves caught up in Congressional investigations, and offers tips for preparing to deal with Congressional scrutiny.

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John Jenkins