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If Shareholders Demand Accountability, The Pentagon Will Listen

Shareholder activism is a proven tool to influence corporate giants.

Words: Mandy Smithberger
Pictures: Fabian Blank

The first time I ever paid attention to the stock market was in my middle school English class when I was 14. Our teacher thought our curriculum should include financial literacy as well as the usual essay assignments. She was the kind of person whose preppy style suggested wealth and who thought it was necessary to take us all under that wing and show us how to follow the money. And so, it was that in addition to reading “The Hobbit” and mapping out the community in “Z for Zachariah” that I also found myself plotting how my investment portfolio was growing. We received a weekly “check” to buy whatever and as much as we could, and I thought I might have had a knack for the task when my General Electric stocks split 3 for 1.

As I suspect is the case for many investors, at that time I was only focused on the stock price. It wasn’t until I joined the Project On Government Oversight (POGO) that I realized that there is a lot of additional information that comprises a company’s financial health. A company’s policies, treatment of workers, integrity, and performance can alter its stock price, and that can place shareholders at odds with executives and the company’s board. How the company decides to spend money and align with policymakers can help or harm investors and shareholders, as clearly demonstrated in the COVID-19 spending debate. As the federal government pushes trillions of dollars out the door for coronavirus relief, there has been increasing public debate about tax dollars that end up going to executive compensation packages and stock buybacks – the priorities of those in charge of these companies are looking increasingly skewed.

I am chagrined, however, to see what shareholders can’t track. How does the company assess the financial benefits of having former government officials as board members and executives?

That makes it incumbent on shareholders to enhance what I call their “governance literacy.” For example, enhanced reporting to shareholders could shed a larger light on how defense contractors and their trade associations worked to prevent invocation of the Defense Production Act. Shareholders could also make clear that the primary interest for their companies and for the economy is to use relief funds to help their employees, not simply to line executives’ pockets.

There’s a plethora of information that can be found in company proxy statements. Most investors might focus on voting for members of the board and weighing in on a few issues those members want to highlight. But there is a lot more information in those reports, and that could be in them, to help learn more about the company and possibly steer improvements in corporate culture, governance, and performance. Those statements often make explicit why companies use the revolving door to peddle influence by justifying the addition of new board members. They also include updates on ongoing litigation and investigations. And it was through those statements that Senator Elizabeth Warren (D-WA) found the six largest Pentagon contractors that spent a total of $163.9 billion in stock repurchases and dividend statements, boosting their own values at the expense of new investments.

As I continue to learn more about what it means to conduct meaningful corporate oversight, I am chagrined, however, to see what shareholders can’t track. How does the company assess the financial benefits of having former government officials as board members and executives? Boeing’s recent track record suggests it might not be to companies’ benefit. Additional concerns about poor oversight led shareholders to vote to split the CEO and chairman roles last month.

Our country’s struggle to respond to this epidemic shows, in part, how crony capitalist policies have hurt federal spending and distorted the free market. The statements about publicly traded companies can reveal a lot about why board members and executives make some of their decisions, but too much is left to the imagination or otherwise requires complex analytical operations and databases to identify relevant connections – such as the OpenSecrets dashboard run by the Center for Responsive Politics. And some activists have seen that companies often listen to shareholder pressure. That includes GEO Group, a major immigration detention center contractor, which was forced to increase reporting on its behavior and performance in regard to human rights. This can provide important, often untapped, opportunities to make companies report what they’re doing for the common good.

The Supreme Court’s decision in Citizens United also pointed to the need for shareholders to step up. “With the advent of the Internet, prompt disclosure of expenditures can provide shareholders and citizens with the information needed to hold corporations and elected officials accountable for their positions and supporters,” Justice Anthony Kennedy wrote. “Shareholders can determine whether their corporation’s political speech advances the corporation’s interest in making profits, and citizens can see whether elected officials are ‘in the pocket’ of so-called moneyed interests.”

Of course, shareholders are only a piece of the puzzle. The best solution is for the government to demand transparency and accountability. For example, a draft executive order offered during the Obama administration would have required full disclosure of campaign spending and contributions by entities who seek government contracts. While POGO opposed tying this disclosure to the procurement process, we did support knowing more about the use of corporate dollars for electioneering by companies receiving taxpayer dollars. Another important step the government should take towards accountability would be for the Office of Management and Budget to create a process for timely disclosure of when executive branch government employees meet with entities attempting to influence federal contracts or other financial arrangements. That kind of transparency could help ensure our tax dollars are awarded based on merit and need, not political connections.

The head of acquisition for the Pentagon, Ellen Lord, said that current corporate responsibility conditions placed on CARES Act funds have deterred many publicly traded companies from pursuing funds. For example, Boeing, which had initially requested $60 billion and ended up with $17 billion in earmarks, decided to pursue bond sales instead after a public outcry. But now, there is currently increasing pressure to decrease the transparency and accountability provisions on federal rescue spending, raising the specter that the billions and billions being requested by the Pentagon in further COVID-19 relief packages won’t have many, or any, accountability provisions at all.

Activist shareholders have demonstrated the capacity to lead the charge. We’ve seen POGO’s work leveraged in a Boeing shareholder proposal that raised questions about whether the company’s cozy relationship with Washington had an adverse impact on safety decisions and the company’s bottom line, and again in a shareholder effort for pharmaceutical giant McKesson citing our contractor misconduct database. Those activists’ successes and potential power is evident in that some on Wall Street are seeking to curb their authority.

The free market doesn’t have to be a race to the bottom – more participation by individual shareholders can instead increase public benefits and profits. The question is whether crony capitalism will be allowed to keep defeating that system.

Mandy Smithberger is the director of the Center for Defense Information at the Project On Government Oversight, a nonpartisan independent watchdog that investigates and exposes waste, corruption, abuse of power, and when the government fails to serve the public or silences those who report wrongdoing. She tweets @StrausReform.

Mandy Smithberger

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