New SEC Chairpersons tend to bring along new priorities. Mary Shapiro, former FINRA regulator, brought a strong regulatory agenda. Mary Jo White, former United States Attorney, is bringing a strong prosecutorial agenda. This shift in priorities appears to have manifested itself in a new Rule List that, at least for now, drops the push for disclosure of corporate political contributions. The pro-regulatory crowd is not going to be happy.
Corporate political spending has been a hot topic since Citizens United in 2010. This ruling gave corporations and unions the ability to spend without limit on political ads, as long as they did not directly contribute to a candidate’s campaign. The people pushing hardest for corporate disclosure of such spending have—no surprise—been those most opposed the policies that corporations are most likely to promote, e.g., less regulation, lower taxes, and reduced trade barriers.
Of course, these political opponents aren’t going to argue that corporate America should not spend money on politics just because they oppose their policies. Americans won’t accept selective application of First Amendment rights. Instead, these opponents have taken a subtler tack, arguing that good governance requires greater transparency.
The argument for greater transparency is based on the idea that shareholders deserve to know how their assets are being used to insure that political spending is for the good of the company, as opposed to the parochial interests of top management. Such information would help shareholders decide if they want to invest in the company. Alternatively, knowing that their investment decisions will be scrutinized, management will be more circumspect with regards to the risk of alienating a substantial portion of their customers or other stakeholders.
Some shareholders are, in fact, asking for such disclosure. To understand why, it is useful to distinguish two kinds of investor. The first is the Economic Investor. This person or institution is primarily, if not solely, interested in the returns they are getting from their investments. Such institutions would include Fidelity, Capital Research, State Street, etc. The second kind is the Parochial Investor. This person or institution wishes to encourage corporate behaviors that are favorable to their own interests as something other than shareholders. These would include state pension funds looking to score political points via their advocacy, union pension funds looking to advance the goals of organized labor, Catholic charities looking to advance social justice, etc. Note that all of these investors generally tend to favor more regulation, higher taxes, and increased trade barriers.
Parochial investors hold up Target as Exhibit A for why corporations should not risk political spending. In 2010, Target gave $150,000 to MN Forward, which supported a Gubernatorial candidate who was very conservative, including holding anti-gay views. Minnesota requires disclosure of political contributions. Target, which had long supported gay rights, was forced to defend this political contribution amidst very negative publicity. In reality, Target’s management supported the conservative candidate’s economic policies much more than they were concerned about his social policies. In other words, they were faced with the same bad choices that most of us routinely face as voters, and they made their choice, as many of us do, based on a balance of considerations. The backlash faced by Target reminded companies that disclosed contributions toward any political candidate are likely to alienate a substantial number of their stakeholders. This knowledge is enough to put a chill on such spending. This suits parochial investors perfectly well; they would prefer a world where corporations spend nothing on politics.
On the other hand, economic investors do not view political contributions as material. Their main concern about such spending is the reputational risk that could arise precisely because of its disclosure.
Of course, if you don’t disclose political spending, you can’t offend your stakeholders. But without disclosure, the fear is that management may indulge in political contributions contrary to their stakeholders’ sympathies. This fear is legitimate, but such a disconnect is inherent in any association making political contributions. Ninety-five percent of union spending goes to one party—the Democrats—even though over 35 percent of their members typically vote for Republicans. Unlike a company’s customers, union members can’t simply stop paying their dues.
When you peel away the layers of posturing and hypocrisy with regards to corporate political spending, the kernel of legitimate governance concern persists. Managers indulging in parochial behavior is wrong, no matter how much worse it is practiced by other institutions. But it is perhaps no worse, and probably much less so, than when these same executives spend money on programs that their critics favor. You never hear anyone question a CEO cutting the ribbon at a new community center built on the shareholder’s dime. Some agency costs are OK.
The SEC has plenty of reason to prioritize its rule-making. It is way behind on rules that are mandated by law, and rules that actually matter to investors as shareholders.