Should the SEC Care About Corporate Politics?

(Originally published here.)

Some Democrats and public pension funds have recently been pressing the Securities and Exchange Commission to adopt rules requiring publicly traded companies to report their political spending. (A petition was first filed in August 2011 by a group of law professors.)

Such rules could actually undermine the SEC’s core mission, which is to protect investors. The key question is whether political activity benefits shareholders and, if so, whether this activity would be reduced if transparency were increased. The answer isn’t straightforward.

Let’s start by acknowledging that many large businesses have excessive influence over legislation and regulation. Banks extract explicit and implicit subsidies worth tens — if not hundreds — of billions of dollars. Regulators who leave government often take lucrative jobs at the companies they once regulated. Retired legislators and their former staff members routinely become lobbyists on behalf of special interests.

This corrupts the democratic process and delegitimizes our institutions and laws. The result, as Daron Acemoglu and James Robinson showed in “Why Nations Fail,” is social decay and economic stagnation. Wresting authority from special interests and restoring the legitimacy of U.S. institutions should be a priority for every lawmaker and voter.

One might reasonably think that corporations would be less likely to meddle in politics if their activism were more obvious. And reasonable people might conclude that the SEC should do what it can to increase transparency by requiring the disclosure of campaign spending.

Remember, though, that the SEC exists because we want capital markets to channel savings toward the most profitable investments. The proposed rules could contradict the interests of shareholders because — you guessed it — some forms of political activism, particularly lobbying, have very high rates of return.

Lobbying is extraordinarily profitable. In 2011, The Economist reported that an index of companies that lobby intensively had outperformed the Standard & Poor’s 500 Index by about 11 percent annually since 2002.

You might think that campaign spending produces similar effects, yet the evidence leans the other way. Researchers have found that “an incremental donation of $10,000 would be associated with a negative 7.4 basis point excess return.” In other words, companies aren’t buying useful influence when they donate to campaigns. Rather, they’re squandering cash. Ironically, this implies that corporate political spending isn’t as effective at advancing corporate interests as some people think.

(There is one positive way to spin these data: Some companies may compensate their executives, in part, by letting them donate company money to favored causes and allowing them to lobby for prestigious government appointments. The problem with this interpretation is that it doesn’t explain why a company would risk alienating customers and lawmakers when it could simply pay its executives a higher salary.)

Other scholars draw distinctions between industries. Companies involved in defense contracting, banking and telecommunications probably benefit from campaign spending, According to John C. Coats of Harvard University, however, the rest are probably wasting shareholder money:

“In the majority of industries (e.g., apparel, retail, equipment), political activity is common but varied, and it correlates negatively with measures of shareholder power (shareholder concentration and shareholder rights), positively with signs of managerial agency costs (corporate jet use by CEOs), and negatively with shareholder value (industry-relative Tobin’s q).”

In other words, most companies that spend money on political issues are worse run than those that don’t. Shareholders would benefit from avoiding them. This suggests that the proposed SEC rules would be a good idea.

(Matthew C. Klein is a contributor to the Ticker. Follow him on Twitter.)


About Matthew C. Klein

I write about the economy and financial markets for Bloomberg View. Before that I wrote for The Economist on a fellowship provided by the Marjorie Deane Financial Journalism Foundation. I have worked at the world's largest hedge fund and read every FOMC transcript since May, 1987.
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