Date: 11/21/97 2:04 PM Subject: RE: File No. S7-26-97 Comments / OMB Watch November 12, 1997 Mr. Jonathan Katz Secretary U.S. Securities and Exchange Commission 450 Fifth Street, NW Washington, DC 20549 Dear Mr. Katz: OMB Watch is writing to comment on File S7-26-97, regarding disclosure and participation requirements for corporate charitable contributions proposed in H.R. 944 and H.R. 945. In the event that an extension is granted, we reserve the right to withdrawal this document and replace it with a more thorough analysis. Taken together, these bills are unworkable and potentially quite damaging to charities. The requirements of these bills, most particularly H.R. 945, are so vague that many companies may simply stop charitable contributions in order to avoid these requirements. H.R. 944 H.R. 944, introduced March 5 by Rep. Paul Gillmor (R-OH), would amend the Securities and Exchange Act of 1934 to require public corporations to disclose to shareholders prior to an annual meeting or other shareholder meetings a list of who received charitable contributions and the amounts given to each organization for the preceding fiscal year. The disclosure requirements under H.R. 944 alone are supportable and are consistent with guidelines for general philanthropy. Unfortunately, H.R. 944 only applies to charitable contributions and does not require disclosure of expenditures for such things as lobbying and issue campaigns or political contributions. Unlike foundations, public companies are not now required to disclose information about their contributions or grants. Principles have been in place for some time regarding disclosure among philanthropies. For example, the Council on Foundations encourages its members to disclose information about contributions in annual reports. Thus, disclosure of charitable contributions is not a controversial issue, nor is it costly to implement. It is, however, limited. For one major U.S. corporation, this legislation would force management to disclose how it spends less than one penny of every dollar it pockets in profits. If the intent of the disclosure bill was to increase corporate accountability, it is interesting that disclosure would only apply to corporate charitable contributions. At the same time, many nonprofit organizations rely increasingly on corporate donations and grant programs for sources of revenue. The Council of Foundations reports that a major trend in philanthropy is an increased role of corporations in funding nonprofits. One established United Way agency reported that 12% of their sizable budget is funded by corporate philanthropy. Without question, disclosure of contributions should be encouraged. But it does not seem necessary to pass legislation to accomplish such an objective. Moreover, its linkage with H.R. 945 raises serious concerns. H.R. 945 H.R. 945, also introduced on March 5 by Rep. Gillmor, would amend the Securities and Exchange Act of 1934 to "afford to [corporate] shareholders the opportunity, on a basis proportional to the number of shares owned or controlled by such shareholder, to participate through a proxy, consent, or authorization in the designation of recipients of the issuer's charitable contributions." Significantly, the bill does not limit the authority of management of corporations and investment funds to make additional contributions, but leaves unclear how this would work. Thus, the bill permits the creation of two grantmaking pools: one that would be public by being subject to shareholder control; the other a private fund controlled by corporate management. An organized minority of shareholders may complain about the two pools since all contributions would need to be disclosed under H.R. 944 and the creation of two pools would become obvious. For the public pool, companies would need to institute a means to allow shareholders an opportunity to designate who should receive charitable contributions. This may mean, as the SEC indicated in its invitation to comment on this issue, that the proportional vote not only allows shareholders the right to designate who gets contributions, but also how much money they should receive. Both H.R. 944 and H.R. 945 allow the SEC to exempt from the requirements gifts of personal property (e.g., items produced by the company), gifts to public or private nonprofit educational institutions (i.e., schools), and gifts to local charities consistent with the public interest, the protection of investors, and the purposes of the bill. In order to reduce the administrative burden imposed by H.R. 945, some public companies may encourage SEC to exercise this option. In this way, these types of contributions need not be voted on by shareholders. Conversely, there would be no requirement for disclosure, thereby defeating the purposes of the bills. Implementation H.R. 944 and H.R. 945 would apply to all publicly held companies, including public utilities and investment firms regulated by the SEC. The New York Stock Exchange (NYSE) has reported that there are 180 million direct and indirect owners of stocks in the NYSE alone. Of these, roughly 60 million are direct stock owners. These bills would reach far beyond the NYSE. The vague language of H.R. 945 means the SEC could implement the bill in a variety of ways. The bill may create a costly and unwieldy system of voting that wastes corporate resources, overwhelms shareholders with information, and still provides shareholders no workable system to hold management accountable. Moreover, the objective of giving individual shareholders greater say is not likely to be achieved. Most shareholders that vote -- or have much clout in voting -- are institutional shareholders, not individual shareholders. Observers note that it is unclear who controls the stocks in these cases, making implementation of these proposals all the more confusing. It would seem, though, that the bill would give greater control to mutual fund and pension fund managers rather than individuals. Some companies have already attempted to seek shareholder perspectives on charitable contributions. For example, Berkshire Hathaway allows shareholders to designate who should receive contributions by having shareholders write in the name of a charity. If the SEC were to adopt the Berkshire Hathaway approach, there would be considerable work for companies. They would need to verify that each designated charity is a tax exempt charity under 501(c)(3) of the Internal Revenue Code; otherwise some contributions may turn out not to be tax deductible. For many reasons Berkshire Hathaway's involvement of shareholders in donations decisions is not a good model for all corporate giving programs. Berkshire Hathaway has a very small number of shareholders, which keeps down implementation costs. Second, to participate in the designation of charities, a Berkshire Hathaway shareholder must own a "Type A" Berkshire Hathaway stock for at least a year. According to a recent Chronicle of Philanthropy article (11/13/97, pg. 16), a "Type A" Berkshire Hathaway stock is currently valued at over $45,000. For this high level of commitment, a shareholder may designate the recipients of a proportion of the corporation's charitable contribution for that year. For their $45,000 investment last year, shareholders were allowed to designate $16 of corporate money to charity. For the amount of money invested, shareholders are designating a relatively small amount of money, raising questions as to whether the money spent administering the program could be better used as charitable donations. Finally, Berkshire Hathaway's leadership is extraordinarily committed to charitable giving; other corporations with less commitment to assisting charities may well decide the costs of compliance with these new regulations far outweigh the potential benefits to the corporation. Ultimately, we fear that the requirements of H.R. 945 will mean that charities lose out. An alternative approach would use the model created by the federal government under the Combined Federal Campaign (CFC). Under the CFC, a directory of eligible charities is published, and federal employees can designate one or more charities from the directory to receive their contributions. If the SEC were to adopt this approach, it would involve developing eligibility criteria. For example, could any tax exempt charity be listed? This would require the SEC to develop a costly process for developing the list of eligible recipients. A third alternative would be for the SEC or each company to print a list of every charity in the country so that companies could send it to every shareholder and allow them to vote on who should receive contributions. Of course, this approach would be next to impossible to do. The mechanics of sending out a massive list of charities would not only be costly but extremely cumbersome. Excluding charities in other countries for the moment, there are roughly 600,000 charitable organizations. How could companies distribute such a list -- the equivalent of a large telephone directory -- and would shareholders be willing to cull through the list to vote on certain charities? Unlikely. Another issue the SEC will have to consider is the international aspect of both corporate giving and stock ownership. The SEC must consider whether corporations will be required to involve foreign owners of stock in the designation of domestic charitable contributions, as well as whether disclosure and participation requirements apply to donations made in foreign countries by U.S.-based multinational corporations. Large multinational corporations have corporate presence all over the world. Will stockholders be asked to choose charities that a corporation supports in Moscow, Tokyo, or Berlin? Enforcing such regulations would be costly and nearly impossible. These questions would have to be addressed by the SEC and only add to the infeasibility of H.R. 945. Virtually any approach adopted by the SEC would require significant changes in corporate philanthropy. H.R. 945 specifically requires companies to obtain shareholder votes on "recipients" of charitable contribution, not just categories for contributions (e.g., arts, children's issues). But exactly how shareholder participation would work remains unclear. Either every designated charity would receive a contribution proportional to the votes it received from shareholders, or only those charities receiving the top percentages would receive contributions. These new requirements only serve to make giving to nonprofits more costly and frustrate efforts to support charities. Alternatively, the SEC could allow companies to choose a bare bones voting system for shareholders. Corporations could prepare a slate of charities to be voted on, possibly allowing for write-ins. Working Assets, a non-profit telecommunications company, currently distributes a slate of charities for its "members" to vote on. This model requires significant time in selecting the slate. Furthermore, many shareholders might not feel knowledgeable enough to vote on whether certain charities should receive contributions, particularly charities local to the company. (Note: This would be particularly difficult for shareholders in other countries. See discussion above.) The bill is also unclear in specifying what shareholders would be allowed to vote on. The bill's reference to voting on a "basis proportional to the number of shares owned... in the designation of recipients" of charitable contributions raises questions as to whether the provision is intended to allow shareholders a vote in the amounts of money donated as well as the recipients of donations. Although the SEC notice about the public comment period indicates that H.R. 945 allows shareholders to designate the charity and the amount of money to be contributed, the bill is rather vague on whether the "designation" also includes the dollar amounts. This method of corporate giving also creates an environment in which well-known charities benefit at the expense of lesser-known groups. A group like the American Cancer Society, which has a relatively high public profile, may have a much easier time of garnering shareholder support than a lesser-known cancer research or treatment entity. Further, both bills give the SEC the authority to exempt from the requirements various types of gifts "consistent with the public interest, the protection of investors, and the purposes" of the bill. These bills leave unclear how the SEC should decide what gifts and potential exemptions are consistent with the public interest, the protection of investors or the purposes of the bill. In fact, the sponsors leave unclear the exact purposes of the bill, making implementation efforts more complex. If the purpose of the bills, taken together, is to empower shareholders and assert shareholder rights generally, one might then conclude that the SEC should use its exemption authority narrowly, granting few exemptions, in the belief that the bills should have the broadest possible coverage. On the other hand, the intent of the bills may be to focus shareholder attention on donations to potentially controversial nonprofits in particular. Assuming local charities and schools are not controversial recipients, the SEC might grant exemptions as broadly as the language of H.R. 944 and H.R. 945 allows under the assumption that local charities and schools may not be considered controversial. The vagueness of the language complicates implementation in other ways as well. Both bills fail to adequately define their terms. The United Way collects and distributes its revenues locally but has a nationally-coordinated fundraising effort. Regional and local organizational boundaries are not clearly defined, and the organizational structures of United Way entities vary from area to area. If the SEC were to grant exemptions for donations to local charities as the bills allow, it would have to decide what type of organization is local or national in scope. The same definitional problems arise when granting exemptions to "educational institutions." While schools and universities clearly fall within this category, less clear is the status of entities such as civic orchestras or museums for which education is an essential activity. These questions would fall to the Securities and Exchange Commission for resolution. While the SEC effectively regulates securities trading, it would seem inappropriate and unreasonable to expect SEC regulators to make these types of determinations. Then, again, all 501(c)(3) tax exempt organizations have charitable and educational purposes as a core mission. So why select just schools and local charities? In addition, how does H.R. 945 impact employee matching programs? Does it negate them because shareholders may disagree with the charities and/or amounts designated by employees? Or would the funds used by corporations to match employee contributions come from the private fund not subject to shareholder participation? These issues would also have to be addressed by the SEC. Finally, H.R. 945 reduces the incentives for corporations to establish and maintain corporate giving programs. Corporations donate in part to establish and solidify relationships with a locality or its customers, or to focus resources on a given issue or challenge facing society. By taking decision-making authority away from corporate strategic planners, H.R. 945 reduces corporate incentives to maintain charitable giving programs. Given the near impossibility of implementing the two bills, the costs associated with implementation, and the added difficulties generated for management in attempting to give corporate contributions to charities, the likely result of the Gillmor bills will be to: * Reduce, if not eliminate, corporate charitable contributions to nonprofits other than schools and certain local charities (assuming the SEC exempts these groups from the requirements of the bills); * Allow companies to put greater reliance on gifts of property rather than gifts of money (again, assuming SEC provides the exemption). For example, a computer company will be able to continue giving computer donations and not be subjected to the requirements of either Gillmor bill; and * Reduce the incentives for corporations to maintain charitable giving programs. In the past, OMB Watch has encouraged efforts to increase shareholder participation in order to lead to greater accountability. We do not see these bills as achieving greater corporate accountability. Furthermore, the costs associated with compliance with these bills will likely move corporations away from charitable giving programs. In addition, these bills are so vague in defining their intent and terms that implementing these proposals is not feasible. As charitable organizations are relying more and more on corporate contributions in an era of decreasing government support, these bills, taken together, would do more to hurt charities than to strengthen corporate accountability. Sincerely, Gary D. Bass Executive Director