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April 28, 2012
Corporate Political Spending: Why Do they Do It?
    by Robert Kropp

With six months to go before election, corporations can still spend freely and in relative secrecy, and do so, despite numerous studies associating political spending with lower returns.


The Center for Political Accountability (CPA) announced earlier this year that the number of corporations agreeing to disclose their direct political contributions has reached 100. "The companies have agreed to disclose their direct corporate political contributions, indirect political spending through trade associations and other groups such as 'social welfare' 501(c)(4)s and to implement board oversight," the organization reports.

The milestone is important, and CPA and the institutional investors with which it collaborates are to be commended unreservedly. However, there are approximately 15,000 publicly traded corporations in the US, and CPA and its allies have been engaging on behalf of disclosure of political spending for almost a decade. Especially in the aftermath of the Supreme Court's Citizens United decision in 2010, it's no wonder that shareowners and other concerned citizens have increasingly called on the Securities and Exchange Commission (SEC) to regulate political spending by all corporations; a petition filed with the Commission last year, calling for mandated disclosure, attracted 70,000 letters in support.

The so-called Super PACs, or independent expenditure-only committees, are permitted to spend unlimited amounts of money in order to support or defeat specific candidates; however, they are barred from contributing directly to candidates. And while the unlimited sums they collect come from corporations as well as other entities, Super PACs must disclose their donors to the Federal Election Commission (FEC).

The most recent data collected by Open Secrets reveals that as of April 29th, Super PACs have collected $202,441,752 and spent $94,203,224.

Perhaps of more concern to proponents for an open electoral system are the activities of the so-called social welfare groups referred to by CPA in its announcement. Organized under section 501(c)(4) of the Internal Revenue Code, social welfare groups do not have to disclose their donors as long as their political activities account for less than half of their expenditures. According to an Open Secrets blog from earlier this year, "Social welfare' is loosely defined, and the groups have thus far escaped much scrutiny by the IRS."

For example, PhRMA, the trade association for brand-name pharmaceutical companies, awarded a grant of $4.5 million to American Action Network, a social welfare group whose political activities include earmarking $4 million for ads critical of President Obama.

One might assume that corporations engage in political spending with the goal of increasing profitability, but academic reports have demonstrated time and again that the reverse is the more likely result. A recent study of corporate political spending from 1991 to 2004 found that political "donations are negatively correlated with future excess returns."

"Firms that donate directly from corporate funds have operating characteristics consistent with the firms facing a free cash flow problem," the report states. "They are large, slowly-growing firms that have more free cash flow, yet engage in less R&D and investment spending."

"Political donations are symptomatic of agency problems within firms," according to the report. It's not surprising, therefore, that the report's authors also conclude that better corporate governance is associated with reduced political spending.

 

 
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