Disclosure of Corporate Political Spending: Problematic or Pragmatic?

• Jurisdiction: United States,Federal
• Publication year: 2014
• Citation: Vol. 1 No. 1

Disclosure of Corporate Political Spending: Problematic or Pragmatic?

Steven Zuckerman

DISCLOSURE OF CORPORATE POLITICAL SPENDING: PROBLEMATIC OR PRAGMATIC?

In the Supreme Court's landmark decision, Citizens United v. Federal Election Commission, the Court ruled that corporate funding of independent political broadcasts in candidate elections could not be limited.¹ In response to this decision, reformers have called for the implementation of rules that would require public companies to seek approval from shareholders, or, at the very least, disclose to shareholders all corporate political contributions.² Despite several proposals at both the federal³ and state⁴ level, there is currently no law that requires disclosure of corporate political spending to shareholders.⁵ Though debates about corporate political spending often devolve into political fights over the reach of the First Amendment, the importance of shareholder access to information and increasing popular opinion suggest that corporations should publicly disclose their political contributions to their shareholders. Corporations, on the other hand, have put forward counterarguments for maintaining the status quo.

As of now, the push for total shareholder disclosure or approval of corporate political spending is embodied in the Shareholder Protection Act (SPA), a proposed federal act that aims to amend the Securities Exchange Act of 1934.⁶ In §14C(b)(1) of the "act," it requires "each solicitation of proxy, consent or authorization by an issuer with a class of equity securities" contain "a description of the specific nature of any expenditure for political activities proposed" and the "total amount of expenditures for political activities proposed to be made by the issuer for the forthcoming fiscal year."⁷ Further, §14C(c)(2) would require a vote of the majority of the outstanding shareholders to make expenditures for political activities.⁸ According to

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§14C(e), "each institutional investment manager shall disclose . . . at least annually . . . how it voted on any shareholder vote."⁹ If it does so, §14C(f) provides a safe harbor against civil, criminal, or administrative actions.¹⁰ According to the author Sen. Robert Menendez from New Jersey, the SPA would "give shareholders a voice over how their corporate dollars are spent on elections."¹¹

The demand for shareholder disclosure of corporate political spending is high and continues to grow. A rulemaking petition filed with the S.E.C. by a coalition of law professors seeking public disclosure of such payments has received over 380,000 letters of support.¹² The petition also received more than 600,000 comments, the most comments received on a petition or rule in the agency's history.¹³ Moreover, an analysis by Institutional Shareholder Services found that the number of shareholder proposals demanding more transparency has been steadily rising, increasing from eighty-eight in 2011 to 126 in 2013.¹⁴ In 2012, investors representing more than $300 billion in assets under management signed an open letter to S&P 500 companies asking them to disclose their political spending.¹⁵ Supporters of disclosure note that in the 2012 federal elections alone, more than $1 billion was spent by outside groups with minimal disclosure.¹⁶

Proponents of the SPA argue that corporate governance is more effective when shareholders have access to all pertinent information regarding their investments. A lack of disclosure is risky for investors. Shareholders and potential shareholders need to know about risky corporate business behaviors

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in order to make well-informed investment decisions.¹⁷ Without disclosure, "shareholders have no way to assess whether corporate political spending benefits them, and have every reason to believe it is fraught with risks to the corporate brand, business reputation, the bottom and, by extension, shareholder returns."¹⁸ Disclosure ensures that corporate money that is donated to candidates, issues and activities aligns with the company's publicly stated values, policies, and practices.¹⁹ Demonstrating greater disclosure and accountability can help corporations build public trust and investor confidence.²⁰

Moreover, there is empirical evidence that politically connected, yet secretive firms have lower value, show worse financial performance, and are more likely to need government bailouts.²¹ One study examined almost a thousand S&P 1500 firms for ten years and found a negative correlation between political spending and both market and accounting performance.²² William S. Laufer, a professor at the Wharton School and director of its Zicklin Center for Business Ethics Research found that "corporate political disclosure and accountability . . . [are] powerful proxies of good governance and . . . competitive advantage."²³ Some of America's most successful companies, including Qualcomm, United...