By Patrick Egan
It is no secret that spending on political campaign contributions has skyrocketed in recent years, especially since the Supreme Court struck down federal campaign spending restrictions as unconstitutional in 2010. What often does remain secret, however, are the identities of political donors. As a result, shareholders have stepped up efforts to require corporations to disclose what they spend on political campaigns and lobbying – and they are doing so in a variety of different ways.
The Supreme Court’s ruling in Citizens United v. FEC allows corporations to make unlimited independent expenditures for federal, state or local candidates. In its opinion, the Court maintained that such a blank check regarding donations would be balanced by disclosure.
“The First Amendment protects political speech; and disclosure permits citizens and shareholders to react to the speech of corporate entities in a proper way,” wrote Justice Anthony Kennedy. “This transparency enables the electorate to make informed decisions and give proper weight to different speakers and messages.”
In reality, though things are not nearly so transparent. All too often, corporate political spending is hidden from shareholders and made via donations to third parties that do not disclose their contributors, such as the U.S. Chamber of Commerce. As a result, shareholders have stepped up efforts to require corporations to disclose what they spend on political campaigns and lobbying efforts. In our post-Citizens United world, shareholders have turned to regulators, proxy votes and “books and records” litigation, all with the goal of increasing disclosure of corporate political spending. Underlying these disclosure battles are two important questions: is political spending on a particular issue or candidate in a corporation’s best interest and does disclosing political spending in this increasingly partisan world cause shareowners more harm than good?
Advocating For More Disclosures
In August 2011, a committee of 10 law professors petitioned the Securities and Exchange Commission to consider a rule to require corporations to reveal their political spending. The SEC has received more than 300,000 comment letters in response to this proposal. While the petition does not propose a specific set of requirements, it does sets forth a general framework for drafting necessary disclosures.
In December, the SEC placed the petition on its regulatory agenda for a decision by April, meaning SEC staff may consider whether to recommend that the Commission propose a new rule. Of course, even if the staff recommends action, any formal rule would be long off, given the recent turnover at the SEC, coupled with a significant backlog of agenda items, such as implementing rules under Dodd-Frank and the JOBS Act. Nevertheless, staff consideration is an important step toward achieving a uniform and consistent approach to corporate political spending disclosures.
Apart from the regulatory approach, for years certain shareholders have advocated for greater disclosure on a company-by-company basis through the yearly-proxy vote. Since 2004, this has been a perennial issue that has only gained momentum since Citizens United. During the 2011 proxy season, out of the 465 shareholder proposals appearing on proxy statements, 50 proposals were related to political spending. And, according to ISS, during the 2012 proxy season, political spending took the top spot among environmental and social proxy question. Preliminary counts show that shareholders this proxy season have filed resolutions at more than 50 corporations asking companies to annually report their federal and state lobbying, including any payments to trade associations used for lobbying and tax-exempt organizations involved in drafting or endorsing legislation.
To date, these shareholder proposals have had little success in garnering votes. But they have spurred dialogue and change. In fact, while no such proposals have passed, large companies are increasingly adopting their own policies regarding corporate disclosures either voluntarily or via collaboration with shareholders. By 2011, 60% of the companies in the S&P 100 have adopted policies regarding corporate political disclosure. And for 2013, there already have been reports of shareholders and corporations collaborating on agreements to develop best practices for corporate political spending, most recently through an announcement between the UAW Retiree Medical Benefits Trust and Walgreens. Time will tell if this spirit of cooperation will continue throughout the 2013 proxy season.
One final avenue for obtaining disclosure is through litigation. Earlier this year, the New York State Common Retirement Fund brought a “books and records” action in Delaware seeking to compel Qualcomm to turn over records of its political spending., The parties reached a settlement whereby Qualcomm agreed to implement a revised political spending disclosure policy. Now, available on the company’s website is a comprehensive list of its political spending, broken up by candidates, federal PACs, 501(c)(4) organizations and trade associations.
More Harm Than Good?
Underlying this disclosure debate is the fundamental question of whether the disclosure of corporate political spending is good or bad for shareholders.
Advocates of greater disclosure adhere to Justice Louis Brandeis’s famous adage that “sunlight is the best disinfectant.” Simply, if corporations are going to be engaged in the political process, then shareholders – who own the corporations – are entitled to know how that money is spent, as well as what procedural safeguards are in place to ensure political spending is in the corporation’s best interest. For every legitimate corporate political expenditure on issues closely tied to the corporation’s business interests, there is ample opportunity and risk that executives could waste corporate resources to support their own pet causes or to further their own personal interests. Adequate disclosure would safeguard against such abuses. Then, as one commentator has noted, disclosure would provide a better understanding of whether a company is competing and winning based on its “superior products and services” as opposed to “superior access to law makers.”
On the other hand, opponents argue that the advocates of greater corporate disclosure are not interested in informing shareholders, but only in curbing political spending. As The Wall Street Journal editorial board commented, the disclosure advocates are “part of a multiyear campaign by unions, left-wing activists and their factotums to expose and then vilify companies that disagree with them.”
Further, opponents emphasize the immateriality of the political spending, when compared with the outsized risks of disclosure. In most cases, the political donations pale in comparison to a company’s revenue, expenses or bottom line. Thus, opponents argue that under most laws and accounting treatments, such small sums would be immaterial and need not be disclosed. Moreover, while quantitatively small, opponents also stress they are qualitatively immaterial, especially when compared to the potential risk imposed by dissenting shareholders. Here, there is room for much debate, but one need not look hard to find evidence of customer and shareholder rebellions.
For example, in 2010, Target contributed $150,000 to MN Forward, a political action group established to promote economic growth in Minnesota, where Target is based. MN Forward, in turn, then supported a number of candidates, one of whom opposed same-sex marriage. Protests and boycotts ensued and the ruckus became a public relations blemish for Target. Eventually, Target issued an apology for the donation and stated its commitment to perform a strategic review of all political donations. Critics of corporate spending disclosures have argued that while Target’s small contribution to MN Forward did not harm Target and was likely in the company’s best interest, the disclosure did cause harm.
Conclusion
In this post-Citizens United age of corporate political spending, shareholders are entitled to know not only what their companies are spending on political causes, but also what controls are placed on those expenditures. This will serve as an important check on unfettered corporate political spending. While company-by-company dialogue is welcome, the result is a patchwork of inconsistent disclosures. Only if the SEC issues a uniform rule, one that properly takes into account the issues and the risk of disclosure, will shareholders have reliable, comparable information to judge whether directors and officers are looking out for the best interest of the corporation.