The Honorable Barney Frank
Chairman, Financial Services Committee
U.S. House of Representatives
2252 Rayburn House Office Building
Washington, DC 20515

The Honorable Spencer Bachus
Ranking Member, Financial Services Committee
U.S. House of Representatives
2246 Rayburn House Office Building
Washington, DC 20515

Dear Chairman Frank and Ranking Member Bachus:

This letter is submitted on behalf of Business Roundtable, an association of chief executive officers of leading U.S. companies with more than $6 trillion in annual revenues and nearly 12 million employees.

We are writing to express our opposition to the Shareholder Protection Act of 2010. The bill raises a number of concerns, including First Amendment issues and the potential for further intrusion on the longstanding role of the states as the primary source of principles relating to the governance of corporations. In this letter, we are elaborating on our concern that the bill, if enacted, will upset the fundamental governance structure of public corporations by creating inappropriate roles for shareholders and boards of directors.

Business Roundtable has long been at the forefront of efforts to improve corporate governance. We have been issuing “best practices” statements in this area for three decades, including, most recently, Principles of Corporate Governance (April 2010). As we discuss in the Principles, effective corporate governance requires a clear understanding of the respective roles of the primary participants in a corporation’s governance structure, including the board and shareholders. Achieving and maintaining the appropriate allocation of responsibilities between the board and shareholders is one of the most critical components of effective governance.
A corporation’s board of directors has the important role of overseeing management’s performance in running the business of the corporation.

The board performs this function on behalf of the corporation’s shareholders. While directors should be informed about the operation of the corporation’s business, they should not become involved with operational matters, which are the province of management. Likewise, shareholders are not involved in the day-to-day management of corporate operations, but they have the right to elect directors to oversee the operation of the corporation in the best interests of both the corporation itself and its shareholders.

The Shareholder Protection Act of 2010 would subvert this structure by requiring shareholders to grant prior approval of anticipated political expenditures at least annually and requiring boards of directors to approve individual political expenditures exceeding $50,000. Customarily, shareholders do not vote on the expenditure of corporate funds – for example, for purposes such as building a new plant or investing in research and development. Similarly, the board of directors of a public corporation generally would not authorize expenditures on a case-by-case basis, except in cases where the dollar amounts are significant, such as the acquisition of another company. In addition, the bill contains an extremely broad definition of political expenditures that includes dues and other payments to trade associations and to tax-exempt organizations if the payments are, or they even “could be reasonably anticipated to be” used for political activities.

By mandating shareholder and board approval of a specific type of expenditure—funds used for political activities – the Shareholder Protection Act of 2010 would involve shareholders in day-to-day corporate operations and place boards of directors in the inappropriate position of micromanaging decisions about the use of corporate funds. This would upset the delicate balance among the roles and responsibilities of shareholders, boards of directors and management. To preserve this balance, which is fundamental to the governance structure of corporations, Business Roundtable believes that decisions about how corporations use their financial resources – including whether and how a corporation should allocate funds for political activities – should remain where they are: within the judgment of a corporation’s management team, acting under the oversight of a board of directors elected by the corporation’s shareholders.

For these reasons, Business Roundtable opposes the Shareholder Protection Act of 2010, and we urge you to do the same when the Financial Services Committee considers it this week.

Sincerely,

Larry Burton
Executive Director
C: U.S. House Financial Services Committee