Last November, I wrote about the limited benefits and reputational risks posed by unlimited corporate campaign contributions. In that piece, I noted, “[T]he Securities and Exchange Commission is giving serious consideration to a rulemaking petition that would require companies to disclose their political spending made with corporate funds.”
It is expected that the Securities and Exchange Commission (SEC) will issue a Notice of Proposed Rulemaking in April. The battle lines already are drawn, and the outcome in question is not really if or when the SEC moves ahead with the rule, but rather the effectiveness of the rule should it be enacted.
Thus, now is the time for those companies wrestling with how to disclose political activities to begin developing effective policies that meet a potential outcome of greater transparency. Even if the SEC rule is not adopted, the public debate around the rulemaking process will raise the scrutiny of corporate disclosure practices.
On one side of the debate are pro-disclosure advocates such as Lucian Bebchuck of Harvard Law School and Robert Jackson of Columbia Law School who petitioned the SEC to begin the rulemaking process. They assert that their proposal “has attracted massive support from a record number of comments filed with the SEC” (the SEC pegs the number of comments at roughly 475,000), and only a tiny fraction of all the comments are in opposition to greater disclosure. The bulk of the supporting comment letters are from institutional investors, labor unions and consumer groups (many of which are allied under the Corporate Reform Coalition).
Republicans, business groups and their supporters such as The Wall Street Journal editorial page argue that greater disclosure hurts the ability of companies to freely engage in the political process to ensure their long-term profitability.
While Republican members of Congress have not been terribly vocal about their opposition to the possible SEC rule, it is likely a number of them are ready to speak out. For example, Republicans recently used the start of the congressional budget process to assert that SEC staff often waste time and resources on burdensome rules such as the conflict minerals disclosure under Dodd-Frank and instead “need to learn to do more with less.”
With that context, I believe there will be two “theaters” of debate that ultimately will decide not just the outcome of the likely SEC rule but, more important, whether or not the rule is effective in forcing greater transparency in corporate political contributions.
The first is the debate in Washington, D.C., that will pit the political parties and many of the opposing groups from the 2012 election against each other. This debate is somewhat predictable in the sense that many of the key actors already are aligned and have made their views public. Nevertheless, how this debate plays out is important because it will have the most direct impact on the details of the rule and possible enforcement mechanisms.
The more far-reaching — but far less predictable — debate will occur between corporate executives and some of their large investors.
It is expected that corporate political disclosure will be a key topic of debate in the 2013 proxy season. As Brad Robinson, managing director specializing in corporate governance at proxy firm Eagle Rock, noted, “[I] think you will see more proposals for companies to have some sort of accountability to shareholders for political spending. This is the first major national election where people and media are up to speed on the implications of the campaign spending laws. I think you will see a big focus on some of these companies when it comes to political spending.”
If companies feel strong pressure from investors and other public audiences during proxy season, their trade associations opposing a SEC disclosure rule will be in a weaker negotiating position before the SEC. The pressure only will increase if proxy proposals seeking greater disclosure consistently receive shareholder support in excess of 30 percent. More important over the long term, the SEC will read the strong proxy support as a clear signal that it is expected to dedicate the resources needed to enforce greater campaign finance disclosure.
While the “Inside the Beltway” debate over campaign finance disclosure will be important to establish the details around the proposed SEC rule, its arguments will be predictable. If those with a vested interest in campaign finance disclosure want to get a true sense of the fate of the SEC’s proposed rule and the expectations on companies going forward, pay attention to the shareholder meetings slated to occur in the coming months across the U.S.