The Activist Investor Blog
The Activist Investor Blog
An Investor Cheer for Corporate Political Speech
What should investors think about corporate political speech (CPS)? That fanciful term encompasses the occasionally grubby contributions to politicians, and less-grubby advertising in support of one or another politician and his or her policies and positions.
In case you haven’t heard, last year the Supreme Court allowed US corporations to contribute directly to these causes and campaigns, in the now-famous Citizens United case. Many observers say that US civic discourse won’t be the same, as money flows freely into politics as never before.
As certain partisans (mostly Republicans linked to conventional business interests) cheered the decision, others (mostly Democratic that oppose those business interests) fought back to limit it. Various investor interests seem to agree with the opponents, which puzzles me. As a citizen and taxpayer, CPS appalls me. Yet as an investor, I’m all for it - the more the better.
Opponents of CPS support two recent developments: a bill in Congress requiring all sorts of new votes and disclosures, and an SEC ruling that allows shareholders a vote on the subject.
The bill in Congress is comprehensive, if nothing else. The Shareholder Protection Act of 2011 will affect corporations and investors alike. Under the Act, corporations will:
❖Disclose planned political expenditures in the annual proxy materials
❖Allow shareholders to vote on planned political expenditures
❖Amend bylaws to require directors to approve all political expenditures over $50,000, and disclose director votes within 2 days of approval
❖Require quarterly and annual reporting on political expenditures and director votes on those expenditures.
Corporations can spend money on CPS only with proper disclosure, director votes, and shareholder votes. “Political expenditures” include direct contributions to politicians, indirect spending on campaigns and other advocacy, and even trade association dues.
Investors have their own requirements, too. Form 13-F filers will need to disclose their votes on these matters. The bill requires this disclosure within 30 days of the vote.
Investors generally like disclosure, the more the better. Yet, mandated disclosure of what for at least a few companies amounts to a source of competitive advantage (wouldn’t Airbus love to know how Boeing does it in the US?) would hurt much more than it helps. Shareholder votes on these subjects matter about as much as a vote on a corporation’s tax policies. And, a bylaw amendment just seems excessive. Seems like a perfect subject for private ordering.
The SEC seems to support the idea of private ordering, too. It allowed an investor in Home Depot, NorthStar Asset Management, to put a resolution on the 2011 Annual Meeting agenda calling for disclosure of HD political contributions, and for shareholder approval of these contributions. HD cited the ordinary business exception to oppose the effort. The SEC sided with NorthStar, reasoning that political contributions represent a significant social policy issue that it typically permits shareholders to review.
Now, this makes a little more sense. If investors want to know how a portfolio company spends its political dollars, or even approve that spend, then investors should have the right to approve whatever policy makes the most sense for that company.
Professors Bebchuk and Jackson also make that case, inadvertently. In a recent paper they suggest “political speech decisions are fundamentally different from, and should not be subject to the same rules as, ordinary business decisions”, and I must disagree. To an investor, CPS spending does not differ from advertising or tax avoidance. In essence, they would have investors regulate CPS on behalf of taxpayers and voters, hardly an efficient solution.
As many investors know, in certain industries (banking, defense and utilities, for starters), a portfolio company’s relationship with the government can make or break it. Smart investors support anything management does to enhance that relationship – lobbying, advertising, and yes, even direct contributions to friendly politicians. It’s no different than having an assertive tax department.
Responsible citizens and taxpayers should support strict limits or even a prohibition on CPS, which will almost certainly corrupt politics with rivers of money. Responsible activist investors, ones that seek portfolio companies that capture every competitive edge, should do the opposite.
Tuesday, July 19, 2011