SEC’s Non-Decision Decision on Corporate Political Activity a Policy and Political Mistake

The SEC’s recent decision to take disclosure of political activities off the SEC’s agenda is a policy mistake, as it ignores the best research on the point, described below, and perpetuates a key loophole in the investor-relevant disclosure rules, allowing large companies to omit material information about the politically inflected risks they run with other people’s money. It is also a political mistake, as it repudiates the 600,000+ investors who have written to the SEC personally to ask it to adopt a rule requiring such disclosure, and will let entrenched business interests focus their lobbying solely on watering down regulation mandated under the Dodd-Frank Act and the 2012 securities law statute, rather than having also to work to influence a disclosure regime.

The connection between political activity and investor concerns is directly reflected in the Wall Street Journal’s own editorializing on the topic, e.g., here, where the WSJ repeats one study’s finding that political activity can increase shareholder returns by 2 to 5% per year. The WSJ does not acknowledge that other studies reach different conclusions—that political activity can be harmful, and its effects vary significantly from firm to firm and over time—but regardless of which study’s results are correct, the materiality of such activity to shareholders is clear, even by the lights of the WSJ.

At a minimum, it should be clear that political activity creates distinct and difficult-to-model risks. Dozens of studies have produced results inconsistent with political activity generally serving shareholder interests. Instead, they support the view that political activity can harm shareholder interests. These harms can flow through many channels—from reputational harm to dilution of strategic focus, from politically risky acquisition bets or capital investments to state laws deterring takeovers. To adequately assess those risks, shareholders need basic, standardized information about political activity—before investing, and afterwards, to monitor corporate performance and make informed decisions. Disclosure of such information is squarely within the SEC’s charge, which has long included disclosure of information under Rule 14a-8 relating to social and political issues of general public interest, under executive compensation disclosure requirements that bear on management conflicts of interest that would not directly have a material impact on firm value, and under the FCPA relating to corporate connections to foreign political officials. Disclosure of political activity would deliver significant benefits to investors at a low cost.

Here is a partial list of academic research demonstrating the relevance of political activity to shareholder interests:

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