CORPORATE POLITICAL CONTRIBUTIONS
WHY THE VEIL?
Power corrupts, and absolute power?… it decimates ethics. Mankind has learned this the hard way. We have understood that it is important to give responsibility to the wings of authority. With those same principles in mind, although a corporate board has a right to formulate strategies and spend money on operations, it is also entrusted with a professional and moral duty to keep the interests of the shareholders at the top of its mind.
In fact, since most of the actions and decisions of the board are numerically “tangible”, trends in financial statements usually indicate whether the company is on the right track or not. Expenses like corporate political spending, however, are not that simple to justify.
It is not possible to disclose the numbers for these “projects”.
CORPORATE POLITICAL SPENDING – FRAILITY OF LOGIC?
Morality apart, it is difficult to find commercial logic for such expenses. This is because it is very difficult to ensure that even if the candidate or party supported by a company wins, he will do something economically significantly for the company.
In any case, one individual does not call all the shots in a Democracy. The probability of your candidate being elected is never 100 percent guaranteed. Spending on political campaigns/candidates is, therefore, more of a gamble than an investment.
In instances where bets on multiple candidates made by several biggies like Citigroup Inc. (NYSE: C), Morgan Stanley (NYSE: MS) & General Electric Company (NYSE: GE) during 2012 Presidential elections, political contributions become more of a (unnecessary?) hedging bet.
Since most of these expenses are through intermediary conduits, it is difficult to be confident that the politician/party will recognize and remember any contributions especially from smaller companies. It is always possible that these “middlemen” pursue their own agenda or push the interest of the bigger contribute more.
Explicit rationality is, therefore, not at the core of the thought process for making corporate politics donations. Hence, there is a great amount of room for discretion swayed by personal or family considerations and erroneous judgment.
The risk of the organization suddenly coming under fire for its political preferences is reasonably high. The shareholders, therefore, should be aware of all the details of these outflows so that they can correct any aberrations to the principles of shareholder wealth maximization.
Since corporations are ultimately democracies, free flow of information is as much a right – based on the spirit of the First Amendment – as what was delivered in the Supreme Court judgment in the Citizens United vs FEC case.
Consequently, one can not hide political spending behind the corporate veil, stating that the company, being a separate entity from the shareholders, has a right to do things without a corresponding obligation to disclose. Importantly, the market value of the corporation may be affected if this information is divulged.
The threat of negative feedback from shareholders makes this information extremely important and procreates the need for the Securities and Exchange Commission (SEC) to formulate rules for disclosure. This availability of information will lead to better price discovery for the enterprise.
The shareholders, existing or prospective, also have an inherent right to know the political ideology of the directors/company. Further more, the overall quantum of political contributions is by no means insignificant with companies like Goldman Sachs Group, Inc. (NYSE: GS) making substantial contributions in the recent Presidential elections.
Rules are required to strengthen the hands of shareholders who do not have easy access to such disclosures as a matter of right.
In any case, is there any harm in disclosing? Why hide these contributions if they part of a company’s strategy? The costs of proper disclosures cannot be the reason (or at least a very good one) to oppose any new regulations. These disclosure costs are not very high as the accounting systems already records these transactions.
Corporate entities are as susceptible to being “harassed” for their political orientation as are normal citizens of any democratic country. So disclosures should be mandated and regulated. However, opposition to formal regulations can easily be traced to vested interests who find the status quo more beneficial.
SEC CONTEMPLATING REGULATION
After several decades of debates & court judgments and increasing public awareness on this issue, the SEC has decided to decisively move forward and make rules for disclosure of corporate political contributions. The submissions by several sections of the society, including investor groups, indicate an increasing amount of interest in exercising the right to know how these funds are distributed.
There is also an acceptance that voluntary disclosures will never work as the irregularities will easily be swept under the carpet. Mandatory disclosures will make the decision makers conscious and help curb any over enthusiasm during elections.
WHAT THE RULES MAY COVER..
The rules may, include the format and the periodicity of the disclosures. The format should definitely contain information about the amount spent, the name of the intermediary, the ultimate beneficiary, the reasons for the choice, source of funding (reserves, profits, loans!!) and also the director (s) supporting the contributions.
This will, in turn, ensure that in case the grant is routed through intermediaries, there is a clear and open understanding on the intended purpose. This is because most of these intermediaries are legally not obliged to disclose to the public what they ultimately do with the money.
These intermediaries may obtain tax benefits from their contributions which ultimately becomes another channel for funding of politics by the general public. If the board claims that, in spending through intermediaries, it is not able to ascertain the end user of the money, then it does not have a right to spend the money anyway.
Uniformity in the format will lalso help collate and consolidate data for better evolution of the rules. Since most of the “approval” of the shareholders for the spending will be ex-post facto, the rules should also prescribe some limits or criteria for political spending.
Similar to election laws, the SEC rules should define political contributions clearly to include all that is relevant. It is not advisable to make exceptions for small contributions because even small contributions are indicative of the political preferences. Rules may also prescribe reflecting these expenses more clearly in the financial statements and in the footnotes.
Any disclosures could be made annually in normal years and more frequently during a Presidential election. The information should ideally be put up on the website of the company for all to see. Lastly, the rules should guide, coax & coerce organizations into forming some policy on political contributions as done by several companies like Google Inc (NASDAQ: GOOG) & Apple Inc. (NASDAQ: AAPL).