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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 and Milton Handler Fellow at Columbia Law School. This post is based on their forthcoming article, Shining Light on Corporate Political Spending. Bebchuk and Jackson served as co-chairs of the Committee on Disclosure of Corporate Political Spending that filed a rulemaking petition concerning political spending, discussed on the Forum here and here. Their earlier work on corporate political spending, Corporate Political Speech: Who Decides?, is discussed on the forum here, here and here.
In our new paper, Shining Light on Corporate Political Spending, we put forward a comprehensive, empirically-grounded case for SEC rules requiring public companies to disclose their political spending. We provide empirical evidence on the need for such rules and respond to the full range of objections that have been raised to mandatory disclosure in this area. The paper, which will be published by the Georgetown Law Journal, is available here.
Our paper systematically develops the case for the position taken in a rulemaking petition that was submitted to the SEC last year by a committee of ten law professors that we co-chaired. The petition has received unprecedented support, including from comment letters submitted to the SEC by more than a quarter of a million individuals. In addition, the petition has drawn supportive commentary from institutional investors, editorials in the New York Times and Bloomberg News, 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 the Wall Street Journal’s editorial page.
The Chairman of the SEC recently indicated that the agency plans to address the petition’s request for disclosure requirements. And a sitting Commissioner has taken the unusual step of publicly announcing his support for the rulemaking advocated in the petition. Given the SEC’s expected consideration of the petition, and the strong views that have been expressed both in favor of it and against it, our paper provides a comprehensive analysis of the desirability of disclosure rules in this area.
Among other things, the paper considers and responds to the full range of objections that have been raised to SEC disclosure rules for corporate political spending, both in the comment file on our petition and more generally. We show that these objections, both individually and collectively, do not undermine the case for requiring public companies to disclose their spending on politics.
The paper also offers significant empirical evidence that bolsters the case for SEC rules in this area. Among other things, we put forward empirical evidence relevant for assessing the amount of corporate political spending that currently occurs under investors’ radar screen, the level of support among shareholders for disclosure of corporate political spending, and the evolution of voluntary disclosure practices in this area.
Below is a more detailed account of this analysis:
Our paper first explains that the SEC’s disclosure rules have evolved over time in response to increased shareholder interest in some types of information about their companies. The SEC has always had broad authority to adopt disclosure rules, and the body of SEC disclosure requirements has developed considerably over time. Historically, the SEC has often adopted new disclosure requirements when shareholder interest in certain information grew—or when external events made such information more relevant for investors.
The paper then presents and evaluates empirical evidence on the extent to which corporate spending on politics currently occurs under investors’ radar screen. Public companies can, and often do, engage in political spending that is never disclosed, by channeling such spending through intermediaries. We present evidence indicating that public companies currently engage in substantial political spending through these intermediaries. Furthermore, although other types of corporate spending on politics are occasionally disclosed in public filings, collecting the information necessary to identify the amounts or targets of a public company’s spending would require a review of a wide range of disparate sources. As a result, it is currently impractical for a public company’s investors to have a complete picture of the company’s political spending. Indeed, this task is sufficiently demanding that there is currently no dataset or organization that provides investors with information about the aggregate political spending of particular public companies.
We then show that public-company investors have expressed significant interest in receiving information about corporate political spending. We present data indicating that disclosure of political spending is a more frequent subject of shareholder proposals at U.S. public companies than any other corporate governance issue. This evidence of shareholder interest is similar to, but stronger than, the evidence from shareholder proposals that led the SEC to overhaul its executive-pay disclosure rules in 1992. Furthermore, this evidence is consistent with views that institutional investors have expressed in polls, policy statements, and comments on the petition.
The paper proceeds to explain why disclosure rules are necessary to ensure that corporate political spending is consistent with shareholder preferences. We show that the interests of directors and executives with respect to such spending may frequently diverge from those of shareholders. Moreover, because of the expressive significance of political spending, shareholders may attach importance far beyond the amounts spent to political spending that deviates from their preferences. Disclosure, we argue, is indispensable to addressing these concerns. Without disclosure of information about public companies’ spending on politics, corporate-governance procedures that could help address such concerns cannot operate.
We then consider voluntary disclosure of political spending. We first present evidence that, in response to significant interest from investors, more than fifty of the largest U.S. public companies have voluntarily agreed to publicly disclose their spending on politics. While such voluntary disclosure is a useful development, we explain why voluntary disclosure cannot serve as a substitute for SEC rules that would require all public companies to disclose their political spending.
The paper next provides a framework for the design of these rules. We identify and examine several issues that the SEC will need to consider in designing the rules, including the scope of the political spending and public companies covered, the treatment of spending channeled through intermediaries, the setting of de minimis exemptions to the disclosure requirements, and the frequency and timing of disclosure. We explain that the SEC’s staff will be able to address these issues in light of the agency’s expertise and experience with the design of other disclosure rules raising similar questions.
Finally, we consider and address the full range of objections that have been raised to mandatory disclosure rules in this area. In particular, we respond to claims that:
- such rules would harm shareholders because (i) special interests would use the rules to advance their own narrow agendas, (ii) the rules would provide unions, which would not be subject to them, an advantage over corporations with respect to spending on politics, (iii) political spending is beneficial to shareholders, and (iv) shareholder proposals calling for disclosure of political spending commonly do not obtain majority support;
- such rules are unnecessary because of shareholders’ freedom to sell stock and power to vote out directors; and
- such rules should not be adopted because they would be constitutionally impermissible or would represent the SEC’s undesirable involvement in politics.
We conclude that the case for rules requiring disclosure of public companies’ political spending is strong, and that the SEC should promptly proceed to developing such rules. We expect to continue to work on this subject and welcome comments on, and reactions to, our work.
