Corporate political disclosure hits its stride

The Sustainable Shareholder

Corporate political disclosure hits its stride

While the U.S. Supreme Court may have ruled that contributing money to political campaigns and action committees is a form of free speech, the public perception — often bolstered by factual evidence — is that capital provides unequal access to those with political power.

Corporate spending on political contributions and lobbying can create reputational risks — especially when S&P 500 companies spent more than $1 billion on these activities for 2010. Such risks can be managed effectively if companies examine whether their memberships in trade associations that are engaged in lobbying activities accurately represent their corporate interests and policy positions. Shareholders in turn need to understand their companies’ spending for trade association lobbying and the risks they might present.

And now, the Securities and Exchange Commission is considering a rule to require public companies to disclose their spending on politics and lobbying.

SEC Commissioner Luis Aguilar released a statement on Wednesday presenting a clear connection between good corporate governance and shareholders’ capacity to make informed decisions and exercise their rights as investors and owners — it is believed Aguilar wrote this statement partially in response to former SEC Commissioner Paul Atkins’ Feb. 3 Politico opinion piece, “SEC rule on corporate political giving too extreme.”

“Disclosure of corporate governance information in the annual proxy statement also promotes capital formation,” Aguilar states, “as studies have shown a statistically significant relationship between governance quality and cost of capital, in which the market rewards companies perceived to have better governance practices.”

The SEC appears to agree: Its Feb. 15 no-action letter denied Bank of America’s request to exclude a shareholder proposal that asks that the board study the feasibility of adopting a policy prohibiting the use of Treasury funds for direct and indirect political contributions. As a result, two resolutions — one on lobbying and political spending disclosure and another one calling for a policy banning political spending — now can appear on Bank of America's proxy ballot this year.

This watershed moment of SEC opinion will now enable shareholders to speak up on these two topics without worrying that such proposals could be struck down on the basis of being vague, immaterial or duplicative.

The view that political contributions disclosure is material to financial performance is supported by research. The groundbreaking 2010 International Monetary Fund study, "A Fistful of Dollars: Lobbying and the Financial Crisis," drew a notable correlation between banks’ political spending and poor lending practices, which surely affects investors. The study suggested that financial institutions that spend more on buying access to politicians are more likely to engage in riskier loans and securitization processes as well as a higher numbers of defaults, and as such experience poorer share performance.

Efforts by companies to discredit disclosure proposals as reflecting special interests are laughable considering that sustainable investors represent a wide public constituency as well as the monied self-interest of corporations that have wreaked havoc on the economy through negligence, exploitation and unethical and illegal practices that have put the economy at risk.

Acknowledging the 380,000 letters of support for the political disclosure rulemaking petition to the SEC, Commissioner Aguilar stated that “corporate spending on politics is important to shareholders.” In his Wednesday statement, he also agreed that “this is information that would enhance the ability of shareholders to make informed voting and investment decisions.”

According to the corporate transparency nonprofit the Center for Political Accountability, more than 100 major companies and 60 of the largest publicly traded companies in the nation have already begun providing corporate political transparency through voluntary reporting; clearly companies understand the value of such disclosure to shareholders. Companies considered to be leaders in disclosure, restrictions and oversight include Colgate-Palmolive, Exelon, IBM, Merck & Co., Johnson & Johnson, Pfizer, UPS and Dell, according to the CPA.

While voluntary disclosure by companies like these illustrates practicability, it is not sufficient. In his statement, Aguilar concluded, “A well-drafted rule would improve both the quality and comparability of disclosure, as well as helping to provide a level playing field for issuers.”

Shareholder resolutions asking companies to report their federal and state lobbying annually have been filed with more than 50 companies and more than 65 institutional and individual investors for 2013. Resolutions this year have been filed with companies such as Goldman Sachs, Verizon, Chevron, Philip Morris, Pfizer, Citigroup, VISA and Walgreen Co.

These proposals include requests for disclosure of payments to trade associations used for lobbying as well as support for tax-exempt organizations that write and endorse model legislation. It also requests that companies develop decision-making processes and oversight by management and board members.

Photo of a business meeting provided by Picsfive via Shutterstock.