Shining Light On Corporate Political Spending
Harvard Law School; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR) and European Corporate Governance Institute (ECGI)
Warren Buffett’s 2018 Activist Investment
Columbia Law School
Harvard Law School John M. Olin Center Discussion Paper No. 728
The Securities and Exchange Commission (SEC) is currently considering a rulemaking petition requesting that the SEC develop rules requiring that public companies disclose their spending on politics. The petition, which was submitted by a committee of ten corporate law professors that we co-chaired, has received unprecedented support, including comment letters from nearly half a million individuals. At the same time, the petition has also attracted opponents, including prominent members of Congress and business organizations.
This Article puts forward a comprehensive, empirically grounded case for the rulemaking advocated in the petition. We present empirical evidence indicating that a substantial amount of corporate spending on politics occurs under investors’ radar screens, and that shareholders have significant interest in receiving information about such spending. We argue that disclosure of corporate political spending is necessary to ensure that such spending is consistent with shareholder interests. We discuss the emergence of voluntary disclosure practices in this area and show why voluntary disclosure is not a substitute for SEC rules. We also provide a framework for the SEC’s design of these rules.
Finally, we consider and respond to ten objections that have been raised to disclosure rules of this kind. We show that all of the considered objections, both individually and collectively, provide no basis for opposing rules that would require public companies to disclose their spending on politics.
We conclude that the case for such rules is strong. The SEC should develop rules requiring public companies to disclose their political spending.
Shining Light On Corporate Political Spending – Introduction
Public companies’ political spending, and whether it serves the interests of shareholders, is the subject of considerable debate. Currently, however, this debate is conducted in the absence of critical facts. Under current law, public companies are not required to, and commonly do not, report their political spending to shareholders. Thus, it is impossible for shareholders to know whether their companies spend investors’ money on politics—and, if so, how much is spent and for whom.
In this Article, we argue that the SEC should develop rules requiring public companies to disclose political spending to shareholders. We provide empirical evidence suggesting that the amount of such spending is substantial and that investors are increasingly interested in obtaining this information. We offer a framework for the design of rules that would give shareholders the information they need to assess whether corporate spending on politics is consistent with investors’ interests. Finally, we consider and respond to a range of potential objections to rules of this kind.
The Article systematically develops the case for a position taken in a rule- making petition that was submitted to the SEC in August 2011 by a committee of ten law professors that we co-chaired.1 The Petition has received unprecedented support, including comment letters submitted to the SEC by close to half a million individuals. In addition, the Petition has drawn supportive commentary from institutional investors, the editorial staff of Bloomberg News and the New York Times, and a substantial number of members of the U.S. Senate and House of Representatives. At the same time, the Petition, and the push for SEC disclosure rules in this area, has attracted opponents, including legal academics, prominent members of Congress, and commentators such as the Wall Street Journal editorial page.
Before her recent retirement, Mary Schapiro, the former Chairman of the SEC, indicated that the agency plans to address the Petition’s request for disclosure rules. One sitting Commissioner has taken the unusual step of publicly announcing his support for the rule-making advocated by the Petition, while another current Commissioner has announced that he will oppose such rules. Furthermore, the Director and Deputy Director of the SEC’s Division of Corporation Finance recently confirmed that the SEC staff is actively considering the Petition.
Given the SEC’s consideration of the Petition, and the strong views that have been expressed both in favor of it and against it, this Article provides a detailed, empirically grounded case for rules requiring public companies to disclose their spending on politics. We provide a framework for analysis of the desirability of disclosure rules in this area. We conclude that the case for rules requiring disclosure of public companies’ political spending is strong, and that the SEC should promptly develop such rules.
Our analysis is organized as follows. In Part I, we explain that the SEC’s disclosure framework for public companies is not static. SEC disclosure rules have evolved over time in response to increased shareholder interest in particular types of information about their companies. The SEC has always had broad authority to adopt disclosure rules, and the body of SEC requirements has developed considerably over time. Historically, the SEC has adopted new requirements when shareholder interest in certain information grew—or in light of external events that made such information more relevant for investors.
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