The SEC is expected to consider a rulemaking petition requesting that the SEC develop rules requiring that public companies disclose their spending on politics. The petition has received significant support—including more than 490,000 comment letters urging the SEC to act as advocated by the petition—but has also attracted opponents, including prominent members of Congress. The SEC recently indicated that it plans to address the petition’s request this year. Given the SEC’s expected consideration of the petition, we have written an article, Shining Light on Corporate Political Spending, that puts forth a comprehensive case for the rulemaking advocated in the petition—and responds to each of the ten objections that opponents of the petition have raised.
In our post last week, we explained why opponents’ claims that corporate spending on politics is immaterial to investors provide no basis for opposing rules requiring public companies to disclose their political spending. In this post, we focus on a second objection that opponents of these rules have raised: the claim that disclosure rules on political spending will empower shareholders who have special interests, such as pension funds, at the expense of other investors.
Several opponents of the petition have argued that shareholders with private interests in politics could use information on corporate political spending to pressure public companies to direct that spending in the manner that these shareholders prefer—or to extract benefits from public companies for use in their private political agendas. For example, in a recent article Bradley A. Smith, a former Chairman of the Federal Election Commission, argued that disclosure in this area could be used by “interest groups to gin up boycotts and threats” against corporations engaging in political spending.
This argument provides little basis for opposing rules requiring disclosure of corporate spending on politics. For one thing, this argument can be made against any rule that would require companies to disclose information that is necessary for accountability to shareholders. For example, it might be argued that disclosure of executive pay could be used by special-interest shareholders to embarrass directors and executives—and, thus, to extract benefits for the special interests’ private agendas. These arguments have not, of course, carried the day with respect to disclosure of executive compensation, and there is no reason why these arguments should be given any more weight in the area of corporate spending on politics.
Moreover, if political spending enjoys the support of a majority of shareholders, a minority of special-interest investors will not be able to use evidence of such spending as a means of pressuring corporate insiders. Directors and executives will be able to hold off any such attacks with respect to spending supported by a majority of shareholders. There is no reason to expect that disclosure would undermine directors’ and executives’ ability to pursue political spending that a majority of shareholders support. Directors and executives will have reasons to worry about outside pressure only to the extent that they disclose political spending that a majority of shareholders disfavor.
Of course, if a company discloses political spending that a majority of its shareholders disfavor, activist investors as well as others may use the disclosed information to criticize directors and executives for political spending that is contrary to shareholder interests. In that case, however, whatever the investors’ motivation, this criticism would be an important mechanism for discouraging insiders from pursuing political spending that deviates from shareholder preferences in the first place. Thus, claims concerning special-interest shareholders provide little basis for opposing rules that would require public companies to disclose their spending on politics.