Why Commissioner Gallagher is Mistaken about Disclosure of Political Spending

Lucian Bebchuk is Professor of Law, Economics, and Finance at Harvard Law School. Robert J. Jackson, Jr. is Professor of Law 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 all 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 last year in the Georgetown Law Journal. A series of posts in which Bebchuk and Jackson respond to objections to an SEC rule requiring disclosure of corporate political spending is available here.

Last week, Securities and Exchange Commissioner Daniel Gallagher took the unusual step of publishing a letter to the editor of the New York Times expressing his opposition to the SEC even considering companies’ disclosure of political spending. In his letter, the Commissioner vows “to fight to keep” the subject off the SEC’s agenda. As explained below, however, his letter fails to provide a substantive basis for his vehement opposition to transparency in corporate spending on politics.

We co-chaired a committee of ten corporate and securities law experts that submitted to the Securities and Exchange Commission a rulemaking petition urging the development of rules requiring public companies to disclose their political spending. As reflected on the SEC’s webpage for comments filed on our petition, the SEC has now received more than a million comment letters regarding the petition. The petition has attracted far more comments than any rulemaking proposal in the SEC’s history. Last week, The New York Times published an editorial urging the SEC to consider the petition, echoing calls from Members of Congress and investors, and Commissioner Gallagher wrote to explain his opposition to any substantive consideration of the petition.

Commissioner Gallagher’s letter emphasizes the outcome of votes on shareholder proposals requesting that boards provide investors with information on corporate spending on politics. He contends that, because these proposals generally drew less than majority support, shareholders “’don’t care’” about disclosure of corporate political spending.

The Commissioner’s conclusion is unwarranted. As we explained in our recent Article Shining Light on Corporate Political Spending, SEC rules are not designed to give investors only the information demanded by a majority of shareholders. Instead, these rules are intended to make sure that information reasonably sought by a significant number of investors is disclosed. Indeed, current SEC rules require companies to disclose many types of information that would likely not be demanded by a majority of investors if the subject were put to a vote.

For example, most shareholder proposals on issues related to corporate social responsibility, such as those requesting disclosure on the potential effects of the company’s operations on climate change, do not receive support from a majority of shareholders. Nevertheless, the SEC’s staff, noting “increasing calls for climate-related disclosures by shareholders of public companies,” recently issued guidance specifying the circumstances under which a company may be required to disclose matters related to climate change.

Moreover, the SEC’s longstanding practice has been to expand its disclosure requirements in light of shareholder proposals that have significant support—even when the levels of support were substantially lower than the support recently received by proposals related to political spending. For example, in 1992, the SEC amended its rules to require extensive disclosure of top executives’ pay. When doing so, the SEC’s staff noted that shareholder proposals on executive pay at nine well-known public companies as providing support for the need to expand the Commission’s executive-pay disclosure rules. But support for those executive-pay proposals was far weaker than the level of support enjoyed by political-spending proposals today. Indeed, the proportion of shareholders voting in favor of corporate political spending proposals during the 2012 proxy season (21.4%) was nearly twice as high as the percentage that supported the executive-pay proposals the SEC cited when it expanded those rules in 1992 (11.2%).

Thus, the claim that the level of support for shareholder proposals in this area provides a good reason for opposing SEC rules requiring disclosure of corporate spending on politics has no basis in the SEC’s historical or recent approach to developing its disclosure rules. Indeed, thus far, opponents of such rules have utterly failed to provide a basis for avoiding an examination of the subject on the merits. In Shining Light on Corporate Political Spending, and in a series of more recent posts on the Forum, we have considered all the objections that opponents to the petition have raised, and have shown that these objections, either individually or in combination, do not justify opposing transparency in corporate spending on politics.

The petition to require public companies to disclose their spending on politics to investors has received remarkably broad and strong support from commenters, and the case for developing rules in this area is compelling. We hope that, despite opponents’ effort to keep the subject off its agenda, the SEC will, before too long, give careful consideration to this important subject.

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