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E-MailLucian Bebchuk is Professor of Law, Economics, and Finance at Harvard Law School. Robert J. Jackson, Jr. is Associate Professor of Law, Milton Handler Fellow, and Co-Director of the Millstein Center at Columbia Law School. Bebchuk and Jackson served as co-chairs of the Committee on Disclosure of Corporate Political Spending, which filed a rulemaking petition requesting that the SEC require public companies to disclose their political spending, discussed on the Forum here. Bebchuk and Jackson are also co-authors of Shining Light on Corporate Political Spending, published in the April issue of the Georgetown Law Journal. This post is the seventh in a series of posts, based on the Shining Light article, in which Bebchuk and Jackson respond to objections to an SEC rule requiring disclosure of corporate political spending; the full series of posts is available here.
The Securities and Exchange Commission is currently considering a rulemaking petition urging the Commission to develop rules requiring public companies to disclose their political spending. In our first six posts in this series (collected here), we examined six objections raised by opponents of such rules and explained why these objections provide no basis for opposing rules requiring public companies to disclose their spending on politics. In this post, we consider a seventh objection: the claim that disclosure rules in this area would impose substantial costs on public companies—and that the SEC lacks the authority to develop such rules because these costs would exceed any benefits that the rules would confer upon investors.
Several opponents of the petition have argued that the SEC may not require public companies to disclose their spending on politics because the costs of such rules would exceed their benefits. For example, the American Petroleum Institute and the U.S. Chamber of Commerce, which are both significant intermediaries through which undisclosed corporate political spending is currently channeled, recently argued in letters to the SEC that the “Commission could not rationally find that the benefits of such a rule” “could outweigh the huge costs.” There is currently considerable debate over the precise weight that cost-benefit analysis should be given in the SEC rulemaking process generally. Whatever position one takes on that general issue, however, cost-benefit analysis does not preclude the SEC from adopting rules requiring public companies to disclose their spending on politics.
For one thing, such rules would lead to considerable benefits for investors. As we explained in the petition, and in Shining Light on Corporate Political Spending, such rules would give investors information they have long been requesting from the companies they own. Furthermore, disclosure is necessary to ensure that directors and executives make political spending decisions that are consistent with shareholder interests. The benefits of these rules for investors, then, are likely to be significant.
By contrast, the costs of reporting this information are likely to be small for most public companies, even relative to the costs of the SEC’s existing disclosure requirements. Most companies already collect detailed information about their political spending for the company’s key decision makers. To the extent that some firms do not already do so, this reflects a significant flaw in the firm’s internal reporting system, given the potential benefits, costs, and risks associated with political spending. Since most companies already have this information available, however, the costs of providing this information to investors are unlikely to be significant.
Of course, authority for some kinds of spending decisions—such as ordinary business expenditures—is often spread throughout large public companies. Collecting information on spending of this type might indeed be expensive for some firms. But the authority to decide to spend investor funds on politics is, at most firms, concentrated in one or two individuals, usually among the leadership of the firm, and thus disclosure of the amounts companies decide to spend on politics is unlikely to be costly. To the extent that the authority to spend investor funds on politics is scattered throughout some companies, we think this is an obvious governance flaw rather than a basis for resisting disclosure rules in this area. And at most companies, where authority to make these decisions is concentrated in the firm’s leadership, the costs of reporting this information to investors are likely to be small.
Given that the direct costs of reporting are not likely to be significant, opponents of rules requiring public companies to disclose their spending on politics have sought to base their cost-benefit claims on other asserted costs of disclosing political spending. In particular, these opponents have argued that mandatory disclosure rules in this area will deter public companies from engaging in political spending that would be beneficial to shareholders. In our view, however, the effects of the proposed disclosures on public companies’ spending decisions would be beneficial rather than detrimental for investors. To the extent that a company’s political spending is consistent with shareholder interests, there is no reason to expect that disclosure would deter directors and executives from pursuing such spending. And to the extent that disclosure deters directors and executives from engaging in spending that is disfavored by the company’s shareholders, discouraging that spending is a benefit, not a cost, of the proposed disclosures.
The effects of disclosure rules in this area can be expected to be similar to those of current SEC rules requiring disclosure of executive compensation and related-party transactions. Such disclosures may well deter companies from decisions that might otherwise be made concerning executive pay and conflicted transactions. But because this result ensures that such decisions are, on the whole, more consistent with shareholder interests, this effect is widely regarded as a benefit, not a cost, of the current disclosure regime for executive pay and related-party transactions.
Finally, because ensuring that investors receive adequate information about the companies they own is among the SEC’s core functions, the federal courts can be expected to be especially deferential to the SEC’s weighing of benefits and costs in the process of developing disclosure rules. When the SEC concludes that a particular type of information is necessary for investors to have—as it has done many times throughout its history, and as it should do now for information about corporate political spending—a legal challenge to the SEC’s authority on the basis of cost-benefit analysis should not be expected to succeed. Claims that rules requiring public companies to disclose their political spending would impose costs on public companies that exceed the benefits the rules would convey to investors provide no basis for opposing the proposed rules.
