The Untenable Case for Keeping Investors in the Dark

Lucian Bebchuk is the James Barr Ames Professor of Law, Economics, and Finance and Director of the Program on Corporate Governance, Harvard Law School; Robert J. Jackson Jr. is Commissioner of the U.S. Securities and Exchange Commission, and Professor of Law (on leave for public service) at New York University School of Law; James Nelson is Assistant Professor, the University of Houston Law Center; and Roberto Tallarita is Associate Director and Research Fellow at the Harvard Law School Program on Corporate Governance. This post is based on their recent paper.
Commissioner Jackson completed his work on this paper prior to joining the Commission in January 2018. The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any publication or statement by any of its members or employees, and the views expressed herein thus do not necessarily reflect the views of the Commissioners, the Commission or its staff.
Related research from the Program on Corporate Governance and its Research Project on Corporate Political Spending includes Corporate Political Speech: Who Decides? by Lucian Bebchuk and Robert J. Jackson, Jr. (discussed on the Forum here); Shining Light on Corporate Political Spending by Lucian Bebchuk and Robert Jackson (discussed on the Forum here); Citizens United as Bad Corporate Law by Jonathan R. Macey and Leo E. Strine, Jr. (discussed on the Forum here); and Corporate Politics, Governance, and Value Before and after Citizens United by John C. Coates.

The 2018 midterm elections with their record spending are over, but political spending by public companies remains under investors’ radar. In a paper recently placed on SSRN, The Untenable Case for Keeping Investors in the Dark, we seek to contribute to the heated debate on the disclosure of political spending by public companies.

We show that the case for keeping political spending under the radar of investors is untenable. The case for SEC adoption of disclosure rules, we demonstrate, is compelling.

A rulemaking petition urging SEC rules requiring such disclosure has attracted over 1.2 million comments since its submission seven years ago, but the SEC has not yet made a decision on the petition. (Full disclosure: The committee of ten corporate and securities law professors that submitted the rulemaking petition was co-chaired by two of us.) The petition has sparked a debate among academics, members of the investor and issuer communities, current and former SEC commissioners, and members of Congress. In the course of this debate, opponents of mandatory disclosure have put forward a wide range of objections to such SEC mandates. Our paper provides a comprehensive and detailed analysis of these objections, and it shows that they fail to support an opposition to transparency in this area.

Among other things, we examine claims that disclosure of political spending would be counterproductive or at least unnecessary; that any beneficial provision of information would best be provided through voluntary disclosures of companies; and that the adoption of a disclosure rule by the SEC would violate the First Amendment or at least be institutionally inappropriate. We demonstrate that all of these objections do not provide, either individually or collectively, a good basis for opposing a disclosure rule.

Below is a more detailed account of the analysis in our paper:

Public companies are currently not required to, and most do not, report their political spending to shareholders. Over the past seven years, however, a heated debate has been taking place over whether the Securities and Exchange Commission (SEC) should require public companies to provide such disclosure. A focal point for the debate has been a rulemaking petition submitted to the SEC in the summer of 2011 by the Committee on Disclosure of Corporate Political Spending. Since its submission, the petition has attracted far more comments filed with the SEC than any other rulemaking petition, or any other specific issue, in the history of the SEC. (All of these comments are available on the Commission’s website here).

The petition and the proposed disclosure rules have become the subject of an intense debate. On one side, the overwhelming majority of the comments filed with the SEC, including those by numerous institutional investors, have been supportive of the petition. Support has also been voiced by two former SEC chairmen, as well as by a substantial number of members of the U.S. Senate and House of Representatives, including forty-four U.S. senators who wrote to the SEC chair urging a “top priority” treatment of the subject.

At the same time, the petition and its proposed disclosure rules have attracted strong opposition. Such opposition has come from a number of organizations, including the U.S. Chamber of Commerce; many members of Congress, including the current Majority Leader of the Senate and the then-Speaker of the House of Representatives; and law review articles by former SEC Commissioner Paul Atkins, the Manhattan Institute’s James Copland, Pfizer’s Matthew Lepore, Professor Bradley Smith and the Center for Competitive Politics’ Allen Dickerson, and Professor J. W. Verret.

The SEC initially seemed inclined to begin a rulemaking process. Several months after the petition was submitted, the director and deputy director of the SEC’s Division of Corporation Finance indicated that the SEC staff was actively considering the petition and that the Division recognized that it was of great importance. Later that year, Mary Schapiro, then chairman of the SEC, indicated that the agency planned to address the petition’s request for disclosure rules, and the SEC placed the issue on the agency’s regulatory agenda for 2013.

However, several months later, in her confirmation hearings to serve as SEC chair, Mary Jo White faced substantial political pressure to avoid a rulemaking process on political spending transparency. The issue was subsequently removed from the agency’s published agenda for 2014 and has not yet been reintroduced, nor has the SEC issued a formal decision on the rulemaking petition. Furthermore, since 2016, omnibus legislation passed by Congress has precluded the SEC from adopting a rule in this area. Although some scholars and lawmakers hold the view that the SEC may still engage in preliminary consideration of the subject, the agency has so far chosen not to do so.

Thus, since 2013 the SEC has avoided, and has subsequently been precluded from, making a decision on this hotly debated matter. Nonetheless, we believe that the subject is not going away. Polls show that a large majority of individuals who identify as either Republican or Democrat support transparency in this area. Thus, we do not expect that Congress would preclude the SEC forever from an on-the-merits deliberation of the issue. Our aim is to contribute to such an expected consideration once the SEC’s hands are no longer tied.

While opponents to the petition have thus far been successful in erecting political roadblocks, we question whether they have developed a solid on-the-merits basis for their opposition. The substantial time that has passed since the submission of the rulemaking petition and the intense debate on the subject have generated a considerable record and body of writings by opponents seeking to justify their position. Below we analyze these writings and the full range of objections they put forth to assess their validity and merits.

Before proceeding to our analysis of the objections, it is worth commenting briefly on the existing lack of transparency and the main arguments for disclosure. Political spending by public companies is not already transparent to their investors for two reasons. First, public companies can, and do, engage in political spending that is never disclosed; they do this by channeling such spending through intermediaries that do not have to reveal who their donors are. Second, although there are public records for other types of corporate spending on politics, putting together the information necessary to identify the aggregate amounts and targets of a public company’s spending would require a review of a wide range of disparate sources, and it would be impractical for a public company’s investors to have a picture of the company’s political spending without the company assembling it in a standard accessible format.

In Citizens United, the Supreme Court recognized that the interests of directors and executives with respect to such spending may frequently diverge from those of shareholders, and it relied on “the procedures of corporate democracy” to prevent political spending that deviates from shareholder preferences. As the petition explained, disclosure of political spending to investors is a necessary condition for such procedures of corporate democracy to work. Without disclosure of information about public companies’ spending on politics, corporate-governance procedures that could help address such concerns cannot operate. The keen interest that many investors have in receiving such information has been reflected in the frequency of shareholder proposals urging disclosure of such information, the significant support such proposals get, and the decisions by many issuers to start voluntarily disclosing information about political spending in response to shareholder preferences.

Opponents of the petition have made three types of objections to the case for disclosure. The first, which we consider in Part II, questions whether providing investors with information about political spending would benefit them and posits that it might actually be undesirable to do so. In particular, we examine claims based on the potential effects of political spending on corporate profits, abuse by special interests, the need to counter spending by labor unions, the common lack of majority support for shareholder resolutions in favor of disclosure, the immateriality of political spending to companies’ bottom line, and compliance costs. We show that this type of objection does not provide a good basis for concluding that disclosure would not benefit investors.

Another type of objection, which we examine in Part III, argues that, even assuming that disclosure of political spending is beneficial, such information can be provided by companies voluntarily, and voluntary disclosure policies, which many large companies have recently adopted, make mandatory SEC rules unnecessary. Our analysis identifies the limitations of voluntary disclosures and demonstrates that they cannot be relied on to provide public-company investors with information about corporate political spending. We also explain why the lessons of recent voluntary disclosure practice reinforce, rather than obviate, the need for an SEC rule.

Finally, in Part IV, we consider claims that, even if disclosure requirements were desirable, it would be impermissible or inappropriate for the SEC to adopt them. We show that, contrary to opponents’ claims, disclosure rules would not violate the First Amendment but, rather, would promote First Amendment values. Furthermore, because the rule would focus on investor protection, adopting it would not venture into election regulation. We also demonstrate the invalidity of claims that the SEC should not adopt such a rule in order to stay out of politics; we show that, to the contrary, adopting a disclosure rule would represent the SEC’s not letting political considerations keep it from doing its job.

All told, we consider a wide range of different objections—including each of those that have been raised in the debate inside or outside the SEC comments file. We show that none of the considered objections, both individually and collectively, undermine the case for requiring public companies to disclose their spending on politics. Ultimately, when the time for an on-the-merits consideration arrives, our analysis can provide a solid foundation for mandating disclosures that would inform investors on how public companies spend their monies on politics.

The complete paper is available for download here. Comments from readers would be most welcome.

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