The UAW Retiree Medical Benefits Trust (Trust) and leading drugstore chain Walgreen Co. (Walgreens) recently announced an agreement to a multi-year collaboration in which the company would develop a best practice policy approach to corporate political spending and lobbying activities. A product of constructive dialogue between the Trust and Walgreens, the agreement highlights the utility of the shareholder engagement process by underscoring that companies and shareholders can work together to their collective long-term interest.

Walgreens is to be applauded for coming to the table and developing an agreement to work together with the Trust.

The main components of the agreement are:

…continue reading: Benefits Trust and Walgreens Collaborate on Political Spending Disclosure

A hard-fought campaign is over and President Obama has been reelected. Should shareholders take notice? In brief, yes. In the paper, Corporate campaign contributions and abnormal stock returns after presidential elections, forthcoming in Public Choice, we explore the stock market performance of top corporate contributors after the elections that brought Bill Clinton and George W. Bush, respectively, to power. In both cases, the top contributors strongly outperformed the market.

We focus on campaign contributions by corporations before a presidential election and their stock market performance afterwards. From a rent-seeking perspective, companies can have an incentive to spend money for presidential candidates. And, as presidential hopefuls need to raise large sums, campaign contributions by companies and business associations are usually a welcome source of funds. After the 2010 Supreme Court ruling in Citizens United against FEC, which grants companies the same free speech rights (and thus spending in the political process) as those accorded to individuals, corporate campaign contributions are likely to become even more important in the future.

…continue reading: Corporate Campaign Contributions and Abnormal Stock Returns after Presidential Elections

Recent securities regulation, like Sarbanes-Oxley and Dodd-Frank, has been criticized for taking a costly one-size-fits-all approach. The critics suggest that, instead, regulation tailored to different firms, industries, or sectors is beneficial as it reduces compliance costs and the costs that arise from constraining firms’ operating and financing choices. In our paper, The Merits of One-Size-Fits-All Securities Regulation, which was recently posted on SSRN, we develop an analytical model to highlight indirect effects caused by choosing an individualized or generalized regulatory regime.

Securities regulation is enacted to reduce the potential for managers to extract rents from their firm’s investors. We model a regulatory agency that is in charge of securities regulation and can be influenced by two groups: investors and managers. Managers can reduce the extent of regulation by lobbying the agency, which helps them maintain their ability to extract rents. The existence of rents, however, reduces the payouts from firms to investors and this translates into negative political consequences for the regulator. The regulatory agency chooses the quality of securities regulation taking into consideration both the firms’ lobbying and investors’ interests. Our model of an economy with two firms can be interpreted as a multi-industry or multi-sector economy where each firm represents an industry or sector. We compare two regulatory regimes, one in which the regulator is constrained to define a general regulatory quality for both firms or industries (the one-size-fits-all approach) and one where the agency may set different regulation for different firms.

…continue reading: The Merits of One-Size-Fits-All Securities Regulation

Corporate politics continue to generate controversy. Recent items of note include (1) the US Supreme Court’s decision to expand the reach of Citizens United in Western Tradition Partnership; (2) the continued increase in the number of and support for shareholder proposals calling for disclosure of corporate political activity; and (3) a recent “study” sponsored by the conservative Manhattan Institute (and described on the Forum here) purporting to find that – as the Wall Street Journal put it – “politics spending pays” – contrary to my own research, which finds that large public companies that were politically active before Citizens United experience a decline in their industry-adjusted market value after the decision. Each of these developments is discussed briefly below.

…continue reading: Update on Corporate Political Activity

Since the Supreme Court’s 2010 Citizens United decision held that corporate political expenditures are free speech under the First Amendment, various groups and individuals have advocated imposing new limits on corporate political activity. These efforts include calls on shareholders to demand that corporations refrain from involvement in the political process. Such demands have been buttressed by an emergent academic literature which, in contrast to what had been an established perspective, has questioned whether corporate financial contributions and even lobbying are actually in the interest of corporate shareholders. This paper reviews this new literature, contrasts it with previous work on this subject, and determines that the new studies ultimately fail to establish that corporate political activity adversely affects shareholder returns.

Corporate political activities take a variety of forms, including direct campaign contributions, joining and supporting trade associations, lobbying, the hiring of former public officials, advertising to move public opinion, and grassroots advocacy promotions. Lobbying has long been the dominant form for political participation by corporations and other interests: In the 2010 election cycle, for example, firms and other interests spent $6.8 billion on lobbying, compared with PAC expenditures of $1.3 billion.

…continue reading: Corporate Political Spending: Why the New Critics Are Wrong

The 2012 shareholder meeting cycle, in which publicly traded U.S. companies convene to consider corporate business, is reaching an end. One hundred fifty of the 200 largest American companies (by revenues) as ranked by Fortune magazine have held their annual meetings as of May 29, and most of the remainder will do so by the end of June.

2012’s annual meetings have been notable for various shareholder protests, organized by labor unions and their allies in the “Occupy” movement, at various large companies, particularly in the financial sector. [1] This year, as discussed in earlier findings and reports, [2] activists who attempt to influence corporate management through the shareholder voting process have focused their efforts on proposals to increase disclosure of or to limit companies’ political spending and other political activities, as well as proposals to separate companies’ chief executive and chairman positions. Activists have also targeted certain companies’ executive compensation packages, now subject to advisory shareholder votes at all public companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. [3]

…continue reading: Shareholder Activism Focused on Political Spending and Lobbying

The Review of Financial Studies will publish later this year my paper with Zvika Neeman on “Investor Protection and Interest Group Politics.”

The paper models how lobbying by interest groups affects the level of investor protection. In our model, three groups – insiders in existing public companies, institutional investors (financial intermediaries), and entrepreneurs who plan to take companies public in the future – compete for influence over the politicians setting the level of investor protection. We identify conditions under which this lobbying game has an inefficiently low equilibrium level of investor protection. Factors pushing investor protection below its efficient level include the ability of corporate insiders to use the corporate assets they control to influence politicians, and the inability of institutional investors to capture the full value that efficient investor protection would produce for outside investors. The interest that entrepreneurs (and existing public firms) have in raising equity capital in the future, we show, reduces but does not eliminate the distortions arising from insiders’ interest in extracting rents from the capital that public firms already possess. Our analysis generates testable predictions, and can explain existing empirical evidence, regarding the way in which investor protection varies over time and around the world.

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Here is a more detailed outline of the article’s analysis, results, and contributions: The paper seeks to contribute to understanding what determines the level of that protection and the reason such protection might fall short of being optimal. Why do countries vary so much in their level of investor protection? Why do levels of investor protection within any given country change over time? When investor protection is too low, is such suboptimality generally due to lack of knowledge on the part of public officials, which should be expected to disappear as they learn more about which governance arrangements are optimal? Or are there some structural political impediments that may enable excessively lax corporate rules to persist even after they are recognized as inefficient? The paper aims to contribute to answering these questions by developing a model of how interest group politics affects the level of investor protection.

To be sure, a country’s level of investor protection may be influenced by long-standing factors such as the country’s legal origin, its culture and ideology, or the religion of its population, all of which lie outside the realm of current interest group politics. But given that countries do change their investor protection arrangements considerably over time, the level of such protection at any given point in time may also result at least partly from recent decisions by pubic officials. The theory of regulatory capture (Stigler (1971) suggests that the regulatory decisions by public officials might be influenced and distorted by the influence activities of rent-seeking interest groups. In the area of finance, Rajan and Zingales (2003, 2004) and Perotti and Volpin (2008) argue that existing firms seeking to deter entry and retain market power lobby for weak investor protection that would make it difficult for potential entrants to raise capital. Our analysis focuses on another conflict among interest groups – the struggle between public firms’ corporate insiders, who seek to extract rent from the capital under their control, and the outside investors who provided them with capital.

We view lobbying on investor protection as important because, in the ordinary course of events, most corporate issues are intensely followed by the interest group with sufficient stake and expertise but are not sufficiently understood and salient to most citizens. When this is the case, politicians can expect their investor protection decisions to have limited direct effects on voting behavior, which implies that these effects do not significantly influence politicians’ investor protection decisions. In contrast, such decisions may be significantly affected by the activities of organized interest groups.

…continue reading: Investor Protection and Interest Group Politics

The Program on Corporate Governance has recently issued as a discussion paper my piece, co-authored with Zvika Neeman, entitled Investor Protection and Interest Group Politics. We develop in this paper a framework for analyzing how interest group politics influence investor protection levels. Our analysis identifies factors that impede desirable corporate governance reforms, and can help explain the ways in which investor protection levels vary around the world and over time. The abstract of the paper is as follows:

We model how lobbying by interest groups affects the level of investor protection. In our model, insiders in existing public companies, institutional investors (financial intermediaries), and entrepreneurs who plan to take companies public in the future, compete for influence over the politicians setting the level of investor protection. We identify conditions under which this lobbying game has an inefficiently low equilibrium level of investor protection. Factors that operate to reduce investor protection below its efficient level include the ability of corporate insiders to use the corporate assets they control to influence politicians, as well as the inability of institutional investors to capture the full value that efficient investor protection would produce for outside investors. The interest that entrepreneurs (and existing public firms) have in raising equity capital in the future reduces but does not eliminate the distortions arising from insiders’ interest in extracting rents from the capital public firms already have. Our analysis generates testable predictions, and can explain existing empirical evidence, regarding the way in which investor protection varies over time and around the world.

The full paper is available for download here.

Yael Hochberg, Paola Sapienza, and Annette Vissing-Jorgensen have a new study, A Lobbying Approach to Evaluating the Sarbanes-Oxley Act of 2002, that pursues a novel and interesting approach to assessing SOX.  The Abstract of the paper is as follows:

We evaluate the net benefits of the Sarbanes-Oxley Act (SOX) for shareholders by studying the lobbying behavior of investors and corporate insiders to affect the final implemented rules under the Act.  Investors lobbied overwhelmingly in favor of strict implementation of SOX, while corporate insiders and business groups lobbied against strict implementation.  We identify the firms most affected by the law as those whose insiders lobbied against strict implementation, and compare their returns to the returns of less affected firms.  Cumulative returns during the four and a half months leading up to passage of SOX were approximately 10 percent higher for corporations whose insiders lobbied against one or more of the SOX disclosure-related provisions than for similar non-lobbying firms.  Analysis of returns of the post-passage implementation period indicates that investors’ positive expectations with regards to the effects of the law were warranted for the enhanced disclosure provisions of SOX.

The full Article is available for download here.