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November 03, 2011
Investors Call on SEC to Regulate Corporate Political Spending
    by Robert Kropp talks with Adam Kanzer of Domini Social Investments about the investor effort to persuade the Securities and Exchange Commission to consider regulation of corporate political spending. Second of a two-part series.

The first national elections since the Supreme Court's Citizens United decision are on the near horizon, yet voters and investors still lack the tools with which to assess corporate accountability for their political spending activities.

To provide but one example, a recent analysis by Public Citizen found that in the midterm elections of 2010—the first since Citizens United—more than two-thirds of organizations that spent money in electioneering did not identify their donors. As recently as 2006, the percentage that reported donors was almost 100%.

"Corporations have had a growing influence on the political system and the regulatory system," Adam Kanzer, Managing Director and General Counsel of Domini Social Investments, told "It's gotten worse since Citizens United, as last year's midterm elections demonstrated, with millions and millions of dollars going into undisclosed funds. There's no real accountability build into that. The trade associations are getting more and more powerful, and more and more radical."

The likelihood that Congress will pass legislation requiring corporate disclosure of political spending seems remote at best, and the outlook for a con stitutional amendment proposed this week by a group of Democratic Senators will face an even steeper climb.

"If you can't get a bill passed that requires disclosure, you can't get sufficient votes to amend the Constitution," Kanzer observed.

While overturning a Supreme Court decision would require a constitutional amendment, the Citizens United decision was actually quite explicit in stating that Congress has the authority to pass legislation requiring corporate disclosure.

"Congress already has the authority to require disclosure," Kanzer said. "The Supreme Court was very clear on that and basically invited Congress to require real-time disclosure. But Congress can't get anything done."

In the absence of Congressional action, investors have turned to the Securities and Exchange Commission (SEC) as the best source for mandating corporate disclosure. While the number of companies voluntarily disclosing their policies on political spending has grown, that number still totals less than 100 companies. And while investors are increasingly successful in attracting significant support for shareowner resolutions requesting disclosure, the challenge to them would be made much more manageable were the SEC to issue uniform regulations.

In a letter sent this week to the SEC, Kanzer, on behalf of a coalition of institutional investors representing more than $690 billion in assets under management, wrote, "Political disclosure is necessary for the smooth functioning of markets, and fits comfortably within the securities laws and the SEC's framework. It is an important tool that helps shareholders, management and directors deal with significant risks that can threaten companies and shareholder value."

The letter, sent in support of a rulemaking petition submitted to the SEC in August by the Committee on Disclosure of Corporate Political Spending, a group of academics, recommended that the Commission consider requiring public companies to disclose:
• Policies and procedures for political contributions and expenditures, both direct and indirect; and
• Monetary and non-monetary contributions and expenditures (direct and indirect) used to participate or intervene in any political campaign.

Kanzer said of the member of the Committee that submitted the petition in August, "They're all experts on corporate law and securities law, and they believe that it's necessary and that the SEC is the right regulator to do it."

"We've been seeking corporate political disclosure for the past few years, and the point I wanted to make clear to the Commission was that this is not rocket science and you don't need to reinvent the wheel. It's fairly simple," Kanzer said. "Basically, I took the text from the shareholder proposal and put it right into the letter, saying that this is what we want. Take a look at what all the major companies are doing. We're asking for exactly the same thing."

With the regulatory burden of Dodd-Frank mandates and its budget and staffing stretched as much as possible, the Commission does not now have a proposed rule making in place for disclosure of corporate political spending. But as Kanzer said, "The Commission has a huge number of rules to make following Dodd-Frank. Putting a new issue on their agenda is an uphill climb. But there are a lot of investors that are concerned about this issue, that see the clear risks."

Organizations such as the Council of Institutional Investors (CII) and the International Corporate Governance Network (ICGN) have also stated their support for the Committee's petition, but none have been so explicit in making recommendations as the coalition's letter, especially concerning indirect contributions made through trade associations such as the US Chamber of Commerce.

Kanzer was blunt in his appraisal of the Chamber's political activities.

"Look at the debate over the debt ceiling," he said. "Boehner said he was having a hard time getting consensus because there are a lot of new people in Congress. There are a lot of new people in Congress because of the midterm elections. People came in who didn't understand the debt ceiling, who were vehemently opposed to raising taxes on anything."

"Trade associations are not the sole reason for that, but they are contributing to the problem," he continued. "And the lack of disclosure is a significant contributor to the problem. Let us see where the money is going and who it's coming from and let us make more educated decisions."

As an example of the risks incurred by corporations on account of the Chamber's political activities, Kanzer cited the example of JP Morgan Chase, where Domini and other investors have been filing shareowner resolutions on the issue for several years.

"JPMorgan Chase is on the board of the Chamber of Commerce, and the Chamber is suing EPA on climate change," he said. "But Chase has a public policy stating that climate change is real and that they lobby for meaningful climate change regulations. That's inconsistent, and on a pretty critical issue. It looks like they're financing both sides of the issue. It's a waste of corporate assets. If the corporate policy is good for the company's long-term financial outlook, then investors ought to be concerned when they see the company undermining that policy position."

"All of this comes back to our portfolios," Kanzer pointed out. "Disclosure ought to help in our evaluations, because we will understand which companies are succeeding by leaning heavily on the political process, and which are succeeding because they have superior products and services."

"If you see a company that's not aligned with its peers in terms of political spending, it suggests that management faces significant regulatory risks up ahead," he continued. "Disclosure may not fix all these problems, but it will bring about accountability. And it ought to make boards of directors think more intelligently about the risks of using treasury funds for political purposes."

"The silver lining in Citizens United was that it was a very strong endorsement in favor of disclosure," Kanzer said. "With every election that goes by with billions of dollars from undisclosed donors, the issue becomes more critical."


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