The Federalist Society

For Added Sunshine

Corporations, Securities & Antitrust Practice Group Newsletter - Volume 3, Issue 1, Spring 1999

May 1, 1999

Patrick McGurn

For those of you that do not know, Institutional Shareholder Services ("ISS") is a proxy advisory firm. We have about 500 large institutional investors that come to us for recommendations and analysis on various items that show up on corporate proxy statements each year. One issue that has appeared periodically over the last couple of years has been that of charitable contributions.

The issue has recently come to light in legislation offered by Congressman Paul Gillmor of Ohio. There were two separate bills in particular that I think we will probably be referring to during the course of today's discussion. The first bill would require all companies to disclose in their proxy statement, in this case according to rules set down by the Securities and Exchange Commission staff, the line items that were basically outlined by Doug Foshee: how much a company gives in the aggregate overall, a break down of who the recipients are over a certain threshold amount and how much again was given to those particular entities. The second piece of proposed legislation was a little more invasive and borrowed from a concept that Warren Buffet uses at Berkshire Hathaway: allowing the shareholders of the corporation, rather than the management and the Board, to select which entities will actually receive the corporate contributions from the company.

Again, at ISS issues comparable to these have come up on proxy statements from year to year. Generally, when we've seen these contribution proposals, we seek to judge from a shareholder's perspective whether they are cost effective ways of getting information out to shareholders or whether the actions that are being advocated, such as the legislation devolving corporate giving decisions to shareholders, would benefit shareholders over the long term. Our general position on disclosure and on Congressman Gillmor's legislative proposal to require certain basic disclosure is that we do not mind the added sunshine, but we're really not sure on a cost basis that the proxy statement or other existing annual report standard disclosure documents is the right place for this information. Perhaps the internet or filings to the SEC that would be available over the Edgar System would be a better alternative for shareholders to have ready access. For most corporations, this information must be produced for tax purposes already. Therefore, such a requirement should impose only marginal incremental cost, at least in loading this information onto an available platform.

I think we have more problems, however, with the more invasive approach of giving shareholders voice in the actual beneficiaries of a company's largesse. I think that this would entail, especially at large corporations, a great deal of bureaucracy in tabulating these votes and would also lead to contributions that may not serve the long term interest of the corporation. That is assuming that you would get any general consensus in such a widely dispersed group as shareholders as to which charitable organizations are noble recipients and which fall short. I think that most shareholders like to have more information available to them. But they do feel that there are certain basic corporate decisions that are probably best left to the Board of Directors and the management of the company or, where corporations have them, actual charitable foundations.

This all having been said, there is one major exception and one that may be the next step for Congressman Gillmor as far as coming through with a legislative alternative to those two earlier bills. This would include a measure requiring corporations to disclose in the proxy statement any contribution the corporate made to an entity, a charitable entity, with which either one of the directors, the senior executive officers, or any of those individuals' spouses or perhaps direct family members had a relationship. The notion here is that, again, institutional investors care a great deal these days about board room independence. One of the clear loopholes in shareholders discovering the linkages between a corporation and its outside directors is through charitable trusts and foundations and other boards on which they serve. I think that shareholders would benefit from, and groups such as the Council of Institutional Investors have really already demanded, such enhanced disclosure in this area.

I do not think that the SEC needs additional authorization to add this disclosure of potential conflicts of interest into the proxy statement. They could do it under existing regulatory authority. I do believe, however, that they probably do need a push from Congress to show that there is some public interest in providing this additional information. ISS would look forward to Congressional hearings to examine and, hopefully to implement, such targeted disclosure.


Mr. McGurn is a Vice President and Director of Corporate Programs for Institutional Shareholder Services, a Rockville, Maryland based company that is the world's leading provider of proxy advisory, research, and voting agent services. Mr. McGurn is a graduate of Duke University and Georgetown University Law Center and is a member of the Bar in the District of Columbia, Maryland, California, and U.S. Virgin Islands. This article is adapted from remarks given by Mr. McGurn at the Federalist Society's Conference on Corporate Governance, held in New York City on September 18, 1998.


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