By Robert J. Jackson, Jr., Associate Professor of Law, Milton Handler Fellow; Co-Director of the Ira M. Millstein Center for Global Markets and Corporate Ownership, Columbia Law School
A committee of law professors that I co-chair with Lucian Bebchuk has petitioned the SEC to develop rules requiring public companies to disclose the use of shareholder money on politics. The petition has received unprecedented support, including comments from more than 300,000 individuals, institutional investors, and members of the U.S. Senate and House of Representatives. The SEC’s Division of Corporation Finance recently confirmed that the SEC is actively considering the petition, and the SEC’s entry in the Administration’s Unified Regulatory Agenda indicates that the SEC plans to propose rules by April.
In response, opponents of such rules are now urging the SEC not to require public companies to disclose how investor funds are spent on politics. And last week, one Commissioner took the unusual step of announcing in advance that he would not support disclosure rules in this area, telling reporters that the SEC should avoid “politically charged” issues. In a new article forthcoming in the Georgetown Law Journal, Lucian Bebchuk and I explain why arguments like these should give the SEC no pause in proceeding to require public companies to disclose political spending to investors .
Opponents of the petition have emphasized four reasons why public companies should not have to disclose how they spend investor money on politics. First, they argue that disclosure rules in this area would be unconstitutional. Second, they contend that political spending is not sufficiently material to investors to warrant disclosure. Third, they claim that special interests will use these disclosures to advance their private agenda rather than the company’s best interests. Finally, they argue that making rules in this area will inappropriately draw the SEC into political debates. As we explain in our article, Shining Light on Corporate Political Spending, none of these arguments provides a basis for opposing rules that would require public companies to disclose political spending to their investors.
First, several opponents of disclosure—including the Chamber of Commerce, House Speaker John Boehner, Senate Minority Leader Mitch McConnell, and a prominent group of law professors —have argued that, in light of the Supreme Court’s decision in Citizens United v. FEC, requiring public companies to disclose political spending would run afoul of the First Amendment. But it is clear that the Constitution leaves ample room for disclosure rules of this kind. The Court in Citizens United itself upheld the disclosure rules challenged in that case 8-1. More importantly, the Court in Citizens United relied heavily on investors as an accountability mechanism for corporate political spending, arguing that shareholders will be able to determine whether a company’s spending on politics is in the company’s interests. Investors cannot, of course, play this role if they do not know whether and how the company has engaged in political spending. Having relied upon investors to ensure accountability in corporate spending on politics, the Court is unlikely to strike down disclosure rules in this area.
The Chamber has also argued that political spending involves relatively small amounts of money—amounts that are not sufficiently “material” to warrant disclosure. The SEC should have little difficulty rejecting this argument. For one thing, the claim is unsubstantiated by any evidence, because the lack of disclosure makes it impossible to tell exactly how much public companies spend on politics—and, as we show in our paper, the little information we do have suggests that the amounts involved may be significant. For another, where a corporate decision is affected by a divergence between the interests of investors and insiders—as with corporate political spending, where insiders may wish to use shareholder money to pursue their own political preferences—the SEC has long required disclosure of even small amounts, which is why SEC rules require disclosure of executive compensation and self-dealing transactions involving relatively small amounts of money. Finally, corporate political spending carries unique expressive significance for investors. For this type of spending, the costs to investors may go far beyond the amount spent. While investors may be indifferent to corporate spending in small amounts more generally, they may well feel differently about such spending on messages that associate the company—and, thus, the investors themselves—with political positions with which they disagree.
Third, some opponents of the petition, including the editorial board of the Wall Street Journal and a former Chairman of the Federal Election Commission, Bradley A. Smith, have argued that disclosure of corporate political spending will empower shareholders with special interests, such as pension funds, at the expense of other investors. They argue that special-interest shareholders will use data on corporate spending on politics to pressure public companies to direct such spending to their preferred targets. But this argument can be made against any disclosure rule that keeps insiders accountable to shareholders—for example, disclosure of executive pay could be used by special-interest shareholders like labor unions to embarrass managers and extract benefits for the union’s private agenda—and these arguments have not carried the day with respect to disclosure of these matters. More importantly, if certain political spending enjoys the support of a majority of shareholders, a minority of special-interest investors will not be able to use evidence of such spending to pressure insiders. Directors and managers will be able to hold off these attacks if the political spending at issue is supported by a majority of shareholders. There is no reason to expect that disclosure will undermine insiders’ ability to pursue political spending that shareholders want.
Finally, opponents of the petition have echoed Commissioner Gallagher’s claim that the SEC should avoid “politically charged issues,” arguing that entering political debates would limit the SEC’s ability to perform its central function of protecting investors. This argument might reflect the perception that corporate spending on politics favors the Republican Party, and many in that Party have opposed disclosure—although of course without disclosure we cannot know whether corporate political spending does in fact favor one Party over the other. In any event, the SEC should not deprive investors of information they need because the major political parties disagree about the issue. The major parties have often disagreed in other areas—for example, whether and how executive pay arrangements depart from shareholder interests—but this did not preclude, and should not have precluded, the SEC from requiring detailed disclosure on executive pay. To be sure, the SEC should not take action in this area in order to benefit one party over the other. But the SEC should equally not be deterred from giving investors information they need because doing so might have political implications. The SEC’s job is to make sure that companies give investors the information necessary to evaluate the companies they own. In doing so, the SEC should not speculate about how requiring disclosure of that information might influence politics. Indeed, if the SEC chose not to adopt disclosure rules on political spending because of its concerns about the possible political effects of giving investors the information they need, it would be that choice—rather than the decision to adopt disclosure rules—that would reflect inappropriate consideration of political matters by the Commission.
The SEC has recently signaled that it may soon propose rules requiring public companies to disclose political spending to shareholders. The possibility that the SEC might soon act has attracted commentary from several high-profile opponents of such rules. These opponents, however, have offered no convincing reason why shareholders should not be given information on how their money is being spent on politics. The case for transparency in corporate political spending is strong, and the SEC should move promptly to develop rules requiring that public companies disclose their spending on politics to investors.
About the Guest Blogger:
Robert J. Jackson, Jr. is Associate Professor of Law, Milton Handler Fellow, and Co-Director of the Ira M. Millstein Center for Global Markets and Corporate Ownership at Columbia Law School, where his research emphasizes empirical study of executive compensation and corporate governance matters. Before joining the faculty in 2010, Professor Jackson served as an advisor to senior officials at the Department of the Treasury and in the Office of the Special Master for TARP Executive Compensation. Before that, Professor Jackson practiced in the Executive Compensation Department of Wachtell, Lipton, Rosen and Katz.
This post originally appeared on The CLS Blue Sky Blog on January 30, 2013.