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:

• Rajesh K. Aggarwal, Felix Meschke, and Tracy Yue Wang, Corporate Political Donations: Investment or Agency?, Business and Politics : Vol. 14: Iss. 1, Article 3 (2012) (political activity public companies spent less on R&D and political donations correlated negatively with long-term firm-specific stock performance)
• Stephen Ansolabehere, James M. Snyder, and Michiko Ueda, Did Firms Profit From Soft Money? (Jan. 2004) (event study finding no stock market reaction to events leading to approval of Bi-Partisan Campaign Reform Act)
• Holly Brasher and David Lowery, The Corporate Context of Lobbying Activity, Business and Politics Vol. 8: Iss. 1, Article 1 (2006) (public companies, with dispersed owners, more likely to lobby than otherwise similar private companies, with concentrated owners)
• Paul K. Chaney, Mara Faccio, and David Parsley, The Quality of Accounting Information in Politically Connected Firms, 51 J. Acc’t & Econ. 58-76 (2011) (earnings quality of politically connected firms significantly poorer than those not politically connected)
• John C. Coates IV, Corporate Politics, Governance and Value Before and After Citizens United, 9 J. Emp. Leg. Stud. 657 (2012)
• Mara Faccio, Differences between Politically Connected and Non-Connected Firms: A Cross-Country Analysis, 39 Fin. Mgt. 905-927 (2010) (politically connected firms have higher leverage and market shares but underperform relative to non-connected firms)
• Mara Faccio, Ronald W. Masulis, and John J. McConnell, Political Connections and Corporate Bailouts, 56 J. Fin. 2597-2635 (2006) (politically connected firms more likely to need and obtain bailouts and perform worse than non-connected companies, including those that also obtained bailouts)
• Michael Hadani and D. Schuler, In Search of El Dorado: The Elusive Financial Returns on Corporate Political Investments, 34 Str. Mgt. J. 165-181 (2013) (political investments by public companies are negatively associated with market performance)
• John P. Heinz, Edward O. Laumann, Robert L. Nelson, and Robert Saintsbury 1993. The Hollow Core (Cambridge: Harvard U. Press) (markets for lobbying firms plagued by asymmetric information, market failures)
• Deniz Igan, Prachi Mishra, and Thierry Tressel, A Fistful of Dollars: Lobbying and the Financing Crisis (2009) (lenders lobbying more on issues related to mortgage lending had higher delinquency rates and negative abnormal stock returns during key financial crisis events
• Jin-Hyuk Kim, Corporate Lobbying Revisited, 10 Business and Politics (2008) (negative relationship between corporate governance and corporate lobbying)
• David Lowery, Why Do Organized Interests Lobby? A Multi-Goal, Multi-Context Theory of Lobbying, 39 Polity 29–54 (2007) (public companies lobby in part to make evaluation of managers by shareholders more difficult)
• A. Newton et al., The Impact of Political Connectedness on Cash Holdings: Evidence from Citizens United (Revised Feb. 2013) (significant increase in cash holdings of politically active firms relative to inactive firms following Citizens United, exacerbated by poor corporate governance, and documenting a significantly negative market reaction to politically connected firms around Citizens United)
• Mark Smith, American Business and Political Power (U. Chi. 2000) (corporate political activity may impeded ability of shareholders to evaluate managers)
• Philip Tetlock, Expert Political Judgment (Princeton U. Press 2005) (expert political opinion commonly wrong, consistent with expenditures on or reliance on predictions of lobbyists leading to mistakes)
• T. Werner and J. Coleman, Assessing the Potential Effects of Citizens United: Policy and Corporate Governance in the States (Feb. 2013) (finding that firms subject to weak campaign finance regimes lobby for and obtain shifts in anti-takeover laws that benefit management at the expense of shareholders)
• Frank Yu and Ziaoyun Yu, Corporate Lobbying and Fraud Detection, 46 J. Fin’l & Quant. Anal. 1865 (2011) (public firms engaged in lobbying and fraud are less likely to be detected as fraudulent, and evade fraud detection for longer, allowing managers more time to sell shares and leading to greater misallocation of resources during fraudulent periods)