Responding to Objections to Shining Light on Corporate Political Spending (3): The Claim that Political Spending is Good for Shareholders

Posted by Lucian Bebchuk, Harvard Law School, and Robert J. Jackson, Jr., Columbia Law School, on Monday April 15, 2013 at 9:45 am
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Editor’s Note: Lucian Bebchuk is Professor of Law, Economics, and Finance at Harvard Law School. Robert J. Jackson, Jr. is Associate Professor of Law and Milton Handler Fellow 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 Corporate Political Speech: Who Decides? and Shining Light on Corporate Political Spending, coming out this month in the Georgetown Law Journal. This post is the third in a series of posts, based on the Shining Light article, in which Bebchuk and Jackson respond to objections to an SEC rule requiring disclosure of corporate political spending; the full series of posts is available here.

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 nearly half a million comment letters urging the SEC to act as advocated by the petition—but has also attracted opponents. In our article Shining Light on Corporate Political Spending and in this post series, we respond to each of the objections that opponents of the petition have raised.

In our first two posts (available here and here), we explained why opponents’ claims that corporate spending on politics is immaterial to investors, and that disclosure in this area would empower special interest investors, provide no basis for opposing rules requiring public companies to disclose their political spending. In this post, we focus on a third objection that opponents of these rules have raised: the claim that political spending is good for shareholders—and that disclosure will discourage directors and executives from engaging in spending on politics that would be beneficial for investors.

Several opponents of the petition have argued that political spending is usually good for shareholders, and that mandatory disclosure rules will constrain public companies’ freedom to pursue political spending that could increase shareholder value. For example, the Chamber of Commerce, in a comment letter urging the Commission not to adopt the rules proposed in the petition, argued that one cost of such rules would be to discourage public companies from engaging in political spending that would be beneficial for investors.

This argument offers no basis for opposing rules requiring disclosure of corporate spending on politics. For starters, it is important to note that we take no position on whether corporate political spending is good for shareholders; the resolution of that question is not necessary to know whether disclosure of such spending is needed. In our view, such disclosure is needed regardless of the relationship between political spending and firm value. We note, however, that the claim that corporate spending on politics is good for shareholders is hotly debated. Several researchers, including John Coates; Stephen Ansolabehere, James Snyder, and Michiko Ueda; Michael Hadani and Douglas A. Schuler; Deniz Igan, Prachi Mishra, and Thierry Thiesel; and Rajesh Aggarwal, Felix Meschke, and Tracy Wang, have taken the opposite view, and have provided empirical support for that claim. It will not be possible for researchers, and more importantly investors, to determine whether corporate spending on politics is beneficial for investors until there is adequate disclosure of such spending. At present, because so much corporate spending on politics occurs under the radar screen, it is not possible to evaluate the extent to which such spending is consistent with investor interests.

But even if one believed that, on average, political spending is beneficial for shareholders, that fact would not suggest that all political spending by all public companies is good for investors. The accountability that would come from mandatory disclosure of political spending would still improve the alignment of corporate political spending with shareholder interests. And there is no basis for concern that disclosure rules will come with the cost of deterring companies from engaging in political spending that is beneficial for shareholders. Instead, we should expect that disclosure will deter companies from engaging in political spending that is not consistent with shareholders’ interests. This, we think, should be considered a benefit of disclosure rules in this area—not a cost.

For the same reasons, even if one takes the view that executive pay arrangements in public companies, in general, are beneficial for investors, this hardly implies that rules requiring disclosure of executive pay are unjustified. Even if executive compensation arrangements on the whole benefit investors, there may be significant departures from shareholder interests at some firms. Thus, shareholders should be given information about pay arrangements at those firms. Giving investors this information will make it less likely that the pay arrangements at all companies will deviate from shareholder interests.

Finally, it would be inconsistent with the basic philosophy of the securities laws to take the paternalistic view that investors need not receive information about significant decisions made by directors and executives merely because outside researchers think those decisions are generally beneficial for shareholders. Whether political spending is beneficial for investors in general—or at a specific firm—is a matter on which investors should be free to form their own judgments, and we think it is clear that investors should be given the information necessary to make those judgments.

  1. [...] Bebchuk and Jackson. This entry was posted in campaign finance. Bookmark the permalink. ← “California’s Dark-Money Investigation Is Making Conservatives Sweat” [...]

    Pingback by “Responding to Objections to Shining Light on Corporate Political Spending (3): The Claim that Political Spending is Good for Shareholders” | Election Law Blog — April 15, 2013 @ 10:55 am

  2. Political spending is beneficial and does affect all shareholders, preferred holders, clients and all employees in the company.

    All these people benefit form the information.

    Comment by Mark — April 15, 2013 @ 1:07 pm

  3. Speech that is “good for shareholders” — even if true — undermines our free speech rights.

    Shareholders qua shareholders and shareholders qua American citizens have somewhat divergent interests. Even the pension funds – when push comes to shove, you have to believe CALPERS will, if choosing between higher returns and layoffs at one of its investments, it will pick higher returns. See, e.g., Loeb as a keynote speaker at the CII conference on Friday. This whole thing amounts to nothing but a distortion of speech and a manipulation of political rights.

    Can we even call this country a democracy when we’ve admitted that the only thing that matters is your pocketbook? And, in fact, you’re NOT allowed to exercise political rights unless it’s about your pocketbook?

    Comment by Kate — April 17, 2013 @ 10:26 am

  4. [...] work of law professors Lucien Bebchuk of Harvard and Robert Jackson of Columbia. They’ve summarized it at the Harvard Law School blog on corporate [...]

    Pingback by News Corp deal: a new way to police corporate political spending? | Alison Frankel — April 22, 2013 @ 5:45 pm

 

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