September 2, 2011

Increasingly investors have been evaluating the role ofcompanies as they seek to influence legislation, regulation and the publicpolicy debate.

Obviously one way for a company to be an active advocate,especially post the Supreme Court CitizensUnited decision, is to use corporate funds or their PACs to providefunds to affect elections director or indirectly.

Yet companies also work to influence public policy bylobbying directly as well as through trade associations and other third partyorganizations.  And some companies also actively co-ordinate“grassroots lobbying” whereby they reach out to employees and othersupportive groups around the country urging them to write their local Membersof Congress so they can hear from local constituents directly and not from acompany’s Public Affairs office in another state.

For example, when the McConnell Bill was presented to limitthe role of the EPA in addressing Greenhouse Gases related to Climate Change,one oil company sent an email alert to all employees urging them to contacttheir Senator / Representative to support this amendment which constituted afrontal attack on the EPA.

This powerful but indirect grassroots lobbying is much likethe U.S. Chamber of Commerce which sends out regular alerts to its membersurging them to contact their representatives.

Federal Law requires that a company’s federal directlobbying expenditures are publicly disclosed (see sample set of companyprofiles covering two years of expenditures), but indirect expenditures throughthird party and grassroots lobbying are not.  And only 21 states requireany disclosure regarding lobbying of state legislators. In addition, investorsdo not have easy access to this information unless a company adds it to theirwebsite so it is really not directly available.

Thus it is appropriate and timely to ask companies to reporton their lobbying policies, oversight and expenditures just like we seektransparency on political spending.

And some companies do a pretty good job of disclosing suchinformation on their website.

Last year AFSCME took an important step in addressing thisissue by filing resolutions seeking disclosure of lobbying with companies. Theresolution passed muster at the Securities and Exchange Commission (SEC).Formerly, lobbying resolutions had been considered “OrdinaryBusiness” and omitted by the SEC.

Now we know that such a request can properly be presented toa company for inclusion in their proxy for a vote.

I believe that proposing lobbying disclosure for a companyis separate but closely connected to our requests for full transparency onpolitical spending.  However, even though connected, I also believe it iswise to keep the two requests separate and not muddy the waters by combiningthem in one resolution.

I enclose a sample resolution which I have drafted seekinglobbying disclosure.  We also enclose a series of charts on samplecompanies lobbying expenditures we researched.

Note that the resolution seeks more clarity and furtherdisclosure than what is disclosed on the Government website.

I look forward to conversations about your interest in suchan approach as well as companies and industries where such a request should bea priority.

Timothy Smith

Senior Vice President

Director of ESG Shareowner Engagement

Request for Disclosure of Lobbying Policies and Practices

Whereas, businesses, like individuals, have a right to express opinions to legislators and regulators on public policy matters.

However, we believe it is important that our company’s lobbying positions, as well as processes to influence public policy, are transparent.  Public opinion is skeptical of corporate influence on Congress and public policy and questionable lobbying activity may pose risks to our company’s reputation. For example, corporate political spending and lobbying which might harm consumers or the public. Hence, we believe full disclosure of Company’s policies, procedures and oversight mechanisms is warranted.

Resolved:

The shareholders of Company request the Board authorize the preparation of a report, updated annually, disclosing:

1. Company policy and procedures governing the lobbying of legislators and regulators, including through trade associations. The disclosure should include both direct and indirect lobbying and grassroots lobbying communications.

Payments (both direct and indirect, including payments to trade associations) used for direct lobbying as well as grassroots lobbying communications, including the amount of the payment and the recipient.

Membership in and payments to     any tax-exempt organization that writes and endorses model legislation     composed of both corporate members and state legislators.

Description of the decision-making process and oversight by the management and Board for

a.   direct and indirect lobbying contribution or expenditure;

b.   payment for grassroots lobbying expenditure.

For purposes of this proposal, a “grassroots lobbying communication” is a communication directed to the general public that (a) refers to specific legislation, (b) reflects a view on the legislation and (c) encourages the recipient of the communication to take action with respect to the legislation.

Both “direct and indirect lobbying” and “grassroots lobbying communications” include efforts at the local, state and federal levels.

The report shall be presented to the Audit Committee of the Board or other relevant oversight committees of the Board and posted on the company’s website. 

Supporting Statement

As shareholders, we encourage transparency and accountability on the use of staff time and corporate funds to influence legislation and regulation both directly and indirectly as well as grassroots lobbying initiatives. We believe such disclosure is in shareholder best interests. Absent a system of accountability, company assets could be used for policy objectives contrary to a company’s long-term interests posing risks to the company and shareholders.

For example, a company may lobby directly or through a trade association to weaken the Foreign Corrupt Practices Act, or stop the EPA from regulating climate change or trying to limit the Consumer Finance Protection Bureau.

Company funds of approximately $XXXX million from July 1, 2010 to June 30, 2011 supported direct federal lobbying activities, according to disclosure reports.  (U.S. Senate Office of Public Records http://www.senate.gov/pagelayout/legislative/one_item_and_teasers/opr.htm)  This figure may not include grassroots lobbying, to directly influence legislation by mobilizing public support or opposition. Also, not all states require disclosure of lobbying expenditures to influence legislation or regulation.

We encourage our Board to require comprehensive disclosure related to direct, indirect and grassroots lobbying.

By now, most corporate leaders are at least vaguely familiar with Target Corp.’s ill-fated dalliance in the arena of financing election campaigns. During the 2010 Minnesota gubernatorial race, the big Minneapolis-based retailer gave $150,000 to MN Forward, a pro-business fund-raising group that supported Republican candidate Tom Emmer.

Target officials say they liked Emmer’s free-market economic policies, but the conservative politician also opposed gay rights. Word of the contribution, from a company that has long worn its support for equal opportunity in the workplace on its sleeve, ignited a firestorm of protest from the gay and lesbian community.

A loose alliance of activists staged boycotts and picketed Target stores around the country, and in a separate protest, but related to the company’s troubled political connection, earlier this year pop music icon Lady Gaga widely publicized her pullout of an exclusive marketing deal with the retailer. Target officials met with protesters and some riled investors. They offered mea culpas and eventually beefed up the company’s political spending policies and oversight. But the damage to the retailer’s progressive reputation had already been done.

Prior to the contribution, Target had a perfect 100 on the Human Rights Campaign Foundation’s Corporate Equality Index, which measures workplace treatment of gays and lesbians. After getting docked 15 points because of the expenditure, its score stands at 85, about middle of the pack.

At this June’s annual meeting, 10 of the 12 shareholder questions for Chairman and Chief Executive Gregg Steinhafel were about the contribution and Target’s response. “Does anybody have a question relating to our business that’s unrelated to political giving?” an exasperated Steinhafel asked at one point. “I’d love to hear any question related to something else.”

There was nothing illegal about what Target did. Indeed, in 2010, the U.S. Supreme Court affirmed the standing of corporations as “persons,” with First Amendment speech rights. Money passes for speech nowadays, and that means companies are free to give as much as they want to nonprofit political front groups, or even offer more direct support to candidates (as long as they’re not working in concert with their campaigns)—straight from the corporate treasury.

But as the fallout illustrates, just because a company can make political contributions might not mean that it should—at least not without a strong oversight process in place.

“If you’re just doing a business analysis of what this did to Target’s reputation, it wasn’t a very smart thing to do,” says Timothy Smith, senior vice president
and director of environmental, social, and corporate governance shareowner engagement with Walden Asset Management, a $2 billion fund in Boston that owns shares in Target.

Walden sponsored a shareholder resolution calling on Target’s board to perform a “comprehensive review” of its political giving process. The motion was withdrawn after the retailer improved its contribution review policies and gave a board committee direct oversight of future expenditures.

“We’re not saying, don’t make political contributions,” Smith explains. “What we’re saying is, if you’re going to make these kinds of contributions, do it with your eyes open. You need to be willing and able to stand up and explain why it’s in the best business interests of shareowners.”

For boards already struggling with a backbreaking list of external demands, political spending is quickly emerging as another topic that demands attention. Politics is a bare-knuckled, elbows-flying kind of endeavor. At a time of growing partisanship, every statement of political support can generate backlash from customers and investors who don’t agree with the company’s views—or, as in Target’s case, the views it implicitly (or unintentionally) winds up supporting.

By Ted Allen on July 8, 2011 3:56 PM

While most U.S. companies have accepted shareholders’ views on the frequency of future “say on pay” votes, there are at least two exceptions. Annaly Capital Management, a New York-based real estate investment trust, and American Reprographics, a California-based document-management firm, both have said they will hold triennial votes, even though investors gave majority support for annual votes.

Under the Dodd-Frank Act, shareholder votes on pay vote frequency--like the advisory votes themselves--are non-binding, but most boards have quickly acceded to investors’ wishes on this issue, even at companies where management strongly preferred less frequent votes.

“It’s a bad precedent to ignore a majority of shareholders,” noted Lisa Lindsley of the American Federation of State, County, and Municipal Employees, a long-time advocate of annual pay votes. “Companies that choose to ignore their shareowners are inviting additional scrutiny of their board and pay practices.”

Tim Smith of Walden Asset Management, another proponent of annual “say on pay” votes, expressed a similar view. “Clearly, companies disregarding shareholder input without an extensive and extraordinary explanation risk real push back from share owners,” he said.

The vote wasn’t close at either firm. There was 70 percent support at both Annaly and American Reprographics for an annual frequency. So far, 608 companies made recommendations for triennial or biennial votes that were not followed by their investors, according to ISS data.

Annaly justified its decision by citing the non-binding nature of the frequency vote.

“The Board has considered the appropriate frequency of future non-binding advisory votes regarding compensation awarded to its named executive officers. Among other factors, the Board considered the voting results at the Company’s 2011 Annual Meeting with respect to the non-binding advisory vote regarding the frequency of non-binding advisory votes regarding compensation awarded to its named executive officers. The Board has determined that future non-binding advisory votes regarding compensation awarded to its named executive officers will be submitted to shareholders of the Company every three years. The Board will continue to evaluate this decision annually,” the company said in a May 20 filing.

American Reprographics argued that a triennial frequency was appropriate given the three-year employment contracts that it recently reached with its named executive officers.

“The Company believes that any attempt to modify the terms of those contracts prior to expiration could pose an executive retention risk to the Company. In addition, the Company has not historically engaged in problematic pay practices. Rather, compensation paid to the Company’s named executive officers in prior years reveals a practice of curtailing executive compensation in response to a challenging economic environment. A three-year frequency cycle will also allow stockholders to continue to evaluate the effectiveness of the Company’s executive compensation program on long-term performance of the Company. For these reasons, and those set forth in the Company’s 2011 proxy statement, the Company has decided to conduct future stockholder advisory votes on executive compensation every three years until the next required advisory vote on frequency of stockholder advisory votes on executive compensation,” American Reprographics said in a May 3 filing.

While companies are required to hold frequency votes just once every six years, Annaly and American Reprographics could face shareholder proposals on this matter in 2012. Under the final SEC’s “say on pay” rules, companies may omit shareholder proposals that seek a different frequency if they adopt a frequency that is supported by a majority shareholder vote.

It remains to be seen whether investors will oppose these firms’ directors in the absence of a pay vote. Annaly received 75.1 percent support for its pay practices this year, while American Reprographics earned 99 percent approval.

A hat tip to the Davis Polk corporate governance blog for pointing out these filings.

by Robert Kropp

A coalition of investors led by Walden Asset Management plans to introduce resolutions from the floor of Annual General Meetings of six companies, asking them to compare their own policies, priorities and actions to those of the Chamber.

SocialFunds.com -- The disconnect between companies that proclaim a commitment to sustainability and the US Chamber of Commerce has grown since the Supreme Court's Citizens United decision in January, 2010. While the Chamber reportedly dedicated $75 million to defeating candidates with which it disagrees in the recent mid-term elections, the number of companies adopting policies to disclose their political spending activities has increased.

According to a recent newsletter from the Center for Political Accountability (CPA), companies that have adopted disclosure and oversight of political spending now number 85, as seven major companies have recently "agreed to disclose their direct corporate political contributions, their indirect political spending through trade associations and other groups, and to implement board oversight," according to CPA.

In conjunction with CPA, Green Century Capital Management recently announced that it had withdrawn a shareowner resolution at Eastman Kodak after the company agreed to improve disclosure of its political spending.

Referring to the fact that Wells Fargo is among the seven companies that recently agreed to disclosure and transparency, Bruce Freed, President of CPA, told SocialFunds.com, "Wells Fargo is the first of the top-tier banks that has adopted disclosure. The New York banks are obstinate, but Wells Fargo has been taking steps to inform their associations of the prohibition on political spending and to ask for confirmation."

Yet, many of those same companies that have adopted policies on political spending still sit on the Board of the Chamber of Commerce. Freed said, "Of the 85 companies, 23 have disclosed their payments to the Chamber. I would think that most of the 85 companies sit on the Board of the Chamber."

As Timothy Smith, the Senior Vice President of the Environment, Social and Governance Group at Walden Asset Management, told Social Funds.com, "It's important to divide up the resolutions that are seeking more disclosure of political spending." Referring to the recent successes of CPA and other advocates, Smith said, "That's the political spending side of it."

"Then there is the pressure on companies, not just on political dollars spent, but the lobbying and public policy advocacy of the Chamber of Commerce," he continued. "The companies we're addressing sit on the board of the Chamber, which we think compromises their work on sustainability. Some of those same companies have very good policies on political spending disclosure."

"It's good that Green Century got the Eastman Kodak agreement, but Eastman Kodak is still on the board of the Chamber and doesn't seem to be dealing with that," Smith observed. Green Century stated that "the firm will continue to encourage the company to expand its policies and practices."

As an example of the distinction between a good policy on corporate political spending and membership on the Board of the Chamber, Smith brought up IBM.

"IBM has a policy that it doesn't allow any money for political spending. They get an A+ for their policy and disclosure," he said. "But at the same time they're on the board of the Chamber, and obviously the Chamber is taking a whole raft of positions, from trying to undo health care reform and targeting any politician that voted for health care reform, to suing the EPA."

A coalition of sustainable investors led by Walden has introduced resolutions addressing payments to trade associations at 3M, IBM, and PepsiCo. However, to pressure companies on their presence on the Board of the Chamber required a different strategy, because, as Smith pointed out, the Securities and Exchange Commission (SEC) typically excludes proposals that are too specific in addressing corporate operations.

As a result, Walden and its partners have decided upon the strategy of introducing floor resolutions at the Annual General Meetings of six companies in 2011. The adoption of the strategy follows a letter sent to 35 major companies serving on the Board of the Chamber, asking them to evaluate "the significant risks posed by misalignment between company and Chamber policy objectives as well as the Chamber's aggressively partisan role in electoral politics."

"A floor vote does not fall under SEC rules but is actually part of a company's own bylaws," Smith said. "In its proxy statement, the company alerts investors that a resolution will be introduced from the floor. There will be a vote, and you can solicit votes, but we will not be soliciting votes this year. We're making this as a statement to the Board, top management, and the investors in the room."

"If we want to be very specific about a company reevaluating its role on the Chamber of Commerce, we felt it was preferable to use this new strategy and go in with exactly what we wanted to say through a floor resolution," Smith continued. "The language can be much more direct."

Resorting to the strategy of floor action has already produced a victory, according to Smith.

"Pfizer has a new policy on political spending that came as a result of shareowner resolutions prodding them on a range of political spending questions," he said. "We also had a resolution for floor action at Pfizer about their involvement on the board of the Chamber. We engaged in in-depth dialogue with Pfizer, and Pfizer agreed to put the head of its environmental program on the environment committee of the Chamber. So we will not move the resolution from the floor, and we withdrew the resolution on political spending as well."

While the strategy of introducing resolutions from the floor has limitations—for one thing, it is unlikely to attract nearly the number of votes that a more generally worded shareowner resolution might—its use as a tool in support of an emerging issue could increase the options available to shareowners.

"A year ago, very few companies were paying attention to the fact that they were on the board of the Chamber, and whether there were any contradictions," Smith said. "Now, while I can't say we have an enormous number of companies dramatically shifting their position, we have heard from a number of companies that their boards and top management are well aware of this issue and are discussing it."

Shareholder Rebuttal to the PepsiCo Opposition Statement Regarding Political Contribution Policy

Proposal # 7 on Review of Political Contributions Policy

Our Rebuttal and Rationale for a YES vote follows:

We commend PepsiCo’s new forward looking policies and procedures regarding political spending. However, this resolution also focuses on the risks and responsibilities associated with paying dues and serving on Boards of organizations such as the U.S. Chamber of Commerce (the Chamber), particularly when such organizations take positions that appear to contradict PepsiCo’s own policies and positions. PepsiCo’s statement sidesteps this concern and provides no information on the role PepsiCo plays on the U.S. Chamber of Commerce Board or Committees, or how it addresses the perception that the company is communicating contradictory messages about its commitment to sustainability and corporate responsibility.

1.The PepsiCo Board recommends an AGAINST vote without responding to a major component of the resolution:

Notwithstanding PepsiCo’s updated position regarding political contributions policies and disclosure, the company ignores the issue raised by the resolution regarding its Board membership on the Chamber of Commerce. Investors may also be concerned that PepsiCo’s policy is too open ended. Thus we believe that PepsiCo has not responded to a critical component of the resolution which requests that “Board Members institute a comprehensive review of PepsiCo’s political spending policies and oversight processes, both direct and indirect, including through trade associations.”    

Specifically, investors reading the Board’s response in the proxy have received no information on whether or how the Board and senior management:

·Oversee representation on a trade association Board such as the U.S. Chamber of Commerce, including monitoring and assessing their political activities.

·Evaluate any reputational risk by serving on the U.S. Chamber of Commerce Board when the Chamber is aggressively involved in partisan political elections.

·Assess how PepsiCo’s Chamber Board member advances our company’s positions on sustainability and corporate responsibility to influence Chamber policies and lobbying.

2. Risks associated with PepsiCo’s Role on the U.S. Chamber of Commerce Board:

As a Board member, PepsiCo is a key contributor to the decision-making process that influences the work of the U.S. Chamber of Commerce.  The web site of the U.S. Chamber describes the role of Directors as follows: “Directors determine the U.S. Chamber’s policy positions on business issues and advise the U.S. Chamber on appropriate strategies to pursue.  Through their participation in meetings and activities held across the nation, Directors help implement and promote U.S. Chamber policies and objectives.”

PepsiCo appreciates the leadership of the U.S. Chamber of Commerce on many business issues and wishes to continue its membership.  Absent any information to the contrary however, PepsiCo’s Board-level representation is likely to lead investors to assume that our management stands firmly behind the U.S. Chamber’s lobbying, political spending in elections and state referendums, legal actions and public statements on major policy issues. Hence, we believe PepsiCo’s good reputation is linked significantly to actions of the Chamber and that conscientious oversight by the company’s Board and senior executives is essential.

The Chamber’s history on climate change is a good case in point.  In March 2010 the Chamber petitioned the Environmental Protection Agency (EPA), challenging the agency’s finding that greenhouse gases pose a threat to human health.  On July 29 the EPA ruled against the Chamber’s petition, stating that climate science was sound and that a recent controversy over the International Panel on Climate Change (IPCC) Fourth Assessment Report did not demonstrate evidence of a conspiracy to manipulate climate data. Specifically the EPA stated “climate science is credible, compelling and growing stronger.”  The Chamber responded by suing the EPA.

Moreover, the Chamber’s activities are aggressively partisan.  The Chamber reportedly allocated over $50 million in the 2010 elections to unseat candidates who voted for healthcare reform and supported other positions it opposes.  In addition, the Chamber recently has been an advocate of weakening the Foreign Corrupt Practices Act that addresses accounting transparency and concerns related to bribery of foreign officials.

In November the Chamber announced an initiative to raise millions of dollars from its members to start a new anti-regulatory campaign. The initiative focuses on weakening, delaying or defeating new laws and regulations, such as those promulgated by the EPA to regulate greenhouse gases and the recently created Consumer Financial Protection Bureau.

It is difficult to see how these positions are good for PepsiCo or business generally, yet the Chamber goes to great lengths in public presentations and before the U.S. Congress to assert that it speaks for the business community.    

Furthermore, many of PepsiCo’s own company positions are at stark variance with the Chamber’s current path.

Several major companies took a hard look at this misalignment and subsequently withdrew from the Board of Directors or left the Chamber altogether.  In recent years, Nike withdrew as a Board member and Apple, Exelon and PG&E, among others, ended their membership over its climate change position and activities.  Other companies have stated publicly that the Chamber does not speak for them on specific critical issues.

One Chamber Board member, Duke Energy, has stated candidly that it has reviewed Chamber membership several times in recent years. Having decided to remain a member, Duke Energy is committed to communicate its concerns about key positions of the Chamber to encourage better alignment between the two organizations. Other companies on the Board have decided to appoint representatives to key Chamber Committees. PepsiCo has not explained what role it plans to play.

Investors have the right to know what position PepsiCo’s Board member took when the Chamber for example.

·Sued the EPA, challenging the agency’s “endangerment finding” that greenhouse gases are a threat to humans.

·Pledged to work to unseat any member of the U.S. Congress who voted for healthcare reform and to reverse healthcare reform.

·Became a major force in the 2010 elections, spending tens of millions of dollars to promote certain candidates and running ads against others.

PepsiCo is a recognized global leader on issues of sustainability and the environment and has developed a strong supplier Code of Conduct to encourage companies that sell goods and services to our company to be responsible leaders as well. Yet ironically, when it comes to trade associations, and specifically the U.S. Chamber, to which it pays hundreds of thousands of dollars in dues, PepsiCo does not seem to demonstrate the same energy and commitment to hold them accountable for their actions.

We believe that continued board level involvement in the U.S. Chamber compels PepsiCo’s leadership to be an active and effective voice within the organization and to explain its position to investors.

Investors who believe PepsiCo’s political spending policy needs further revision and their role on the Chamber Board deserves a review they should vote in favor of this stockholder resolution.

This is not a solicitation of authority to vote your proxy.  Please DO NOT send us your proxy card; the proponent is not able to vote your proxies, nor does this communication contemplate such an event.  The proponent urges shareholders to vote FOR question number #7 following the instruction provided on the management’s proxy mailing.

For questions regarding PepsiCo Proposal # 7 Report on Political SpendingPlease contact Timothy Smith, Walden Asset Management, 617-726-7155 tsmith@bostontrust.com

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