In July, Representative Carolyn Maloney contacted SEC Commissioner Robert Jackson to solicit his views on legislation that would require public companies to disclose their corporate political spending. Jackson has now responded. In his view, the absence of transparency about political spending has led to a lack of accountability, allowing executives to “spend shareholder money on politics in a way that serves the interests of insiders, not investors.” But because investors typically put their money into mutual funds and other similar investment vehicles, their voting rights are typically exercised, not by the investors themselves, but instead by these institutions on their behalf—and most often not in sync with the surveyed preferences of investors: “while ordinary investors overwhelmingly favor transparency in this area, the biggest institutions consistently vote their shares to keep political spending in the dark.” And, he charges, it’s not just corporations that are opaque about their own political spending—institutional investors are likewise opaque about their votes against shareholder proposals for spending disclosure.

Jackson’s views should hardly be surprising given that, before he joined the SEC, he was one of a group of academics who spearheaded a 2011 rule-making petition requesting that the SEC propose rules requiring disclosure of the use of corporate resources for political activities. Here is a link to a 2013 video segment of the PBS Newshour showing a debate between Jackson and former SEC Commissioner Paul Atkins about the rulemaking petition.  Although the petition received over 1.2 million letters in support, as discussed in this PubCo post, then SEC Chair Mary Jo White was firmly against any rulemaking on the topic, contending that the SEC should not get involved in politics. (But isn’t not acting also political?)  White faced criticism for her position from two former SEC Chairs and one former Commissioner, who politely berated (well, maybe not so politely) her failure to take action on the rulemaking petition. (See this PubCo post.) And in 2015, Senate Dems sent a letter to White adding their voices “to the many who have expressed frustration and disappointment that the SEC decided to remove this issue from its regulatory agenda entirely.” (See this PubCo post.) As discussed in this PubCo post, this PubCo post and this PubCo post, Congressional Republicans have long sought to prevent the use of SEC appropriations for adopting requirements for political spending disclosure, adopting riders to government funding legislation to block any regulation.  (Not that the SEC was addressing the issue anyway.)  After the Dems became the majority in the House, they introduced H.R. 1053, which would direct the SEC to issue regs to require public companies to disclose political expenditures in their annual reports and on their websites. Apparently, Maloney has plans for other legislation that would give shareholders oversight of corporate political spending. But in the absence of regulation, some proponents of political spending disclosure have turned instead to private ordering, often through shareholder proposals. So far, those proposals have rarely won the day.  And the reason for those failures Jackson attributes largely to the absence of support from large institutional investors.

In response to the request from Maloney, Jackson’s staff performed additional analyses of investor interest in corporate spending on politics with the following findings:

“First, the case for requiring disclosure of corporate political spending is strong. Today, corporate executives are free to spend shareholder money on politics in a way that favors insiders’ interests over investors’—for example, by directing spending toward causes that executives personally support. As in other areas where executives’ interests conflict with those of the company’s owners, investors can only hold insiders accountable for the spending of shareholder money on politics if that spending is disclosed.

“Second, although over 70% of ordinary American investors favor disclosure of political spending, their shares are nearly always voted against proposals to require transparency. The reason is that some institutions managing Americans’ savings have chosen to vote against shining light on corporate political spending. Those institutions provide investors with either vague or nonexistent disclosure of that choice, raising the concern that investors don’t understand how their money is being voted when it comes to corporate spending on politics. The legislation you asked me to review would give shareholders oversight of corporate political spending; it is crucial that ordinary investors understand how the institutions who manage their money would use that power.”

As expected, Jackson strongly supports legislation mandating political spending disclosure; in his view, the absence of SEC rules means that investors are largely left “without information about how their money is spent on politics.” But compounding that problem, Jackson says, is the lack of transparency on the part of some institutional investors, which “consistently vote American families’ money to keep corporate political spending in the dark, and I am concerned that investors are unaware of that fact. That’s why today I’m calling upon those institutions to tell investors where they stand on transparency of corporate spending on politics.”

According to a 2013 study by Jackson, just eight third-party intermediaries—none of which disclosed the source of their contributions—spent $1.5 billion of investor money on elections over six years.  While there is some mandatory disclosure of federal election spending, it is not designed for investors and state spending is not required to be disclosed, with the result that “most public-company political spending occurs under investors’ radar.” Particularly worrisome to Jackson is that executives’ interests in political spending are not necessarily aligned with those of shareholders and may even advance insiders’ preferred political views.  Citing two studies, Jackson asserts that “studies show that political spending is associated with corporate governance problems that affect firm value.” Disclosure, he argues, “would help ensure that corporate political spending is aligned with the interests of investors—not corporate insiders.”

The scarcity of political spending disclosure has made it “the second-most common subject of shareholder proposals at U.S. public companies. Although shareholder support for these proposals has doubled over the last decade, and given that the overwhelming majority of investors favor disclosure of corporate political spending, support for these proposals is lower than investor preferences would suggest.”  Why is that? The reason, Jackson contends, based on a study by his office of the “voting data for hundreds of the largest institutional investors over the last fifteen years,” is that “three of the largest institutions in America almost never support proposals that would require disclosure of corporate political spending.”  More specifically, according to Jackson’s data, they vote in favor less than 5% of the time, “regardless of the company or situation.” (Of course, it’s particularly ironic that institutional investors have, for the most part, shied away from political spending proposals, especially in light of their expressed concern with sustainability. See, for example, this PubCo post and this PubCo post. After all, corporate political spending could well be devoted to purposes inconsistent with those sustainability goals.)

Not only do these institutions fail to support political spending proposals, contrary to the views of the majority of investors, Jackson argues, they generally don’t disclose their proxy voting policies on this issue.  To determine if investors were aware of the voting pattern, Jackson looked at the institutions’ proxy voting guidelines and concluded that “in most cases, these institutions offer little or no transparency to ordinary investors about their voting record on corporate political spending.” For example, in one case, although the institution uniformly voted against over 800 political spending proposals, no voting policy was disclosed on this issue, raising the concern to Jackson that investors were unaware of these voting decisions. Only BlackRock “had an explicit proxy voting policy regarding corporate political activities.” In this context, for a “thoughtful and forceful case for why these voting patterns can raise concerns about the legitimacy of corporate spending on politics,” Jackson refers us to another paper by Strine.

Posted by Cydney Posner