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E-MailCaroline Crenshaw is a Commissioner at the U.S. Securities and Exchange Commission; and Michael E. Porter is the Bishop William Lawrence University Professor at Harvard Business School. The views of Commissioner Crenshaw expressed in this post do not necessarily reflect the views of the Securities and Exchange Commission, its staff, or other commissioners.
Related research from the Program on Corporate Governance includes The Untenable Case for Keeping Investors in the Dark by Lucian Bebchuk, Robert J. Jackson Jr., James David Nelson, and Roberto Tallarita (discussed on the Forum here); Shining Light on Corporate Political Spending by Lucian Bebchuk and Robert J. Jackson Jr., (discussed on the Forum here); and Corporate Politics, Governance, and Value Before and After Citizens United, by John C. Coates, IV.
In the wake of January’s attack on our democracy, business leaders across America are rightly reconsidering whether, and how, public companies should participate in politics. Household names ranging from Coca-Cola to Facebook are halting campaign contributions to certain elected officials after the Capitol siege. These leaders now understand that the longstanding system for corporate participation in politics—giving shareholder money to dark intermediaries that indirectly fund campaigns—is broken. In its place, a new playbook for corporate political participation is emerging—one that focuses on solving the Nation’s problems rather than funding partisan gridlock. We know that if we truly want American companies to change their role in politics, we must first require transparency on how shareholder money is spent on politics, and for what.
For years, public companies have used money from American investors to finance secretive social welfare, trade associations, and third parties in Washington. Investors have repeatedly requested information on political spending—last year, shareholders voted in favor of greater disclosure 80% of the time that question was on a corporate ballot. Yet, the U.S. Securities and Exchange Commission is not able under current rules to require transparency for all public companies. The reason is that Congress, reinforced by party partisanship, has conditioned the SEC’s funding on not finalizing a rule that requires disclosure of corporate political spending. With our nation’s financial watchdog sidelined, American investors have no way to determine whether and how their money is spent on corporations’ preferred political causes.
It doesn’t have to be this way. As one of us recently explained in the Harvard Business Review, well-accepted management theory shows why the role of American business in politics has become so counterproductive: the short-term rewards of socially destructive lobbying are too tempting for executives under constant pressure to maximize earnings. That’s why in the 1990s, rather than grapple with the risks of opioid addiction, the pharmaceutical industry spent more than $700 million through trade associations and third parties not subject to disclosure, to weaken federal and state opioid regulations. Paying government to do nothing can be profitable in the short run. But, as opioid manufacturers discovered, this proved to be ultimately disastrous for both business and the citizens that corporations exist to serve.
Corporate leaders are now seeing that their corporate purpose goes beyond the bottom line. There is a growing understanding that they have a responsibility to create an economy that serves all Americans. But if the law allows executives to spend shareholder money on politics in secret, advancing an economy that serves all Americans is more challenging. Indeed, while certain companies stated publicly during the Trump Administration that the U.S. should remain party to the Paris climate accord, reports indicate they spent shareholder money to oppose this. And because of Congress’s restrictions on the SEC, their shareholders didn’t know. Besides posing real risks to investors, conflicts like these rob corporate leaders of the credibility they’ll need to play a productive role in creating inclusive economic growth.
As with so many problems in the American boardroom, a key place to begin is with Justice Brandeis’s maxim: “sunlight,” he explained, “is the best disinfectant.” Executives who will have to disclose shareholder money spent on politics will be in a better position to insist that any such spending be consistent with the corporation’s publicly stated ideals. Those who choose to pursue special interest spending will have the opportunity, and indeed the obligation, to explain their reasons to investors. And information about that spending will be available to everyone, rather than a secret whispered in Washington hallways and corporate boardrooms.
For students of management science, it is no surprise that Congress has limited the SEC in this area. For some incumbent politicians, today’s circumstances—where shareholder money flows freely into campaigns, unbeknownst to investors—can be beneficial. But the evidence shows that it can be harmful for the investors the SEC is sworn to serve. And, to our knowledge, this is ironically the only area where Congress currently bars the SEC from adopting rules that are necessary to protect investors.
America’s corporate leaders can, and should, play a productive role in solving the Nation’s problems, not reinforcing partisan gridlock. They should welcome the opportunity to do so in broad daylight. It is time for business leaders to call on Congress, and the SEC, to provide investors with political spending disclosure. Only then will American companies be able to credibly claim that they can be part of the cure for what plagues our politics.
