In his muckracking classic, Other People’s Money – And How Bankers Use It, progressive reformer Louis Brandeis famously wrote, “Sunlight is the best of disinfectants.” In the modern financial system, corporate executives often control funds that don’t belong to them. To Brandeis, transparency and disclosure were effective means of minimizing the risk of executives misusing those funds, either wasting them away negligently or enriching themselves nefariously. Inspired by Brandeis, Congress created the Securities and Exchange Commission to oversee publicly traded companies and to create a more open, reliable, honest marketplace for investors.
Brandeis’s heirs in the progressive movement – along with other opponents of the Supreme Court’s decision in Citizens United – have sought to have the SEC direct some sunlight on corporate political spending. This week the Commission closed the shades. In announcing its 2014 “Priorities,” the SEC omitted any mention of corporate political transparency. The implication is that the SEC will not issue any new rules on this, despite announcing late last year that it was considering “a proposed rule to require that public companies provide disclosure to shareholders regarding the use of corporate resources for political activities.”
The news was an unexpected setback for the Corporate Reform Coalition, a group of institutional investors, government reform advocates, and labor unions that has been pushing for the SEC to compel disclosure of corporate political spending. The Coalition helped secure over 600,000 comments submitted to the SEC as part of the rulemaking process – a record. "We're incredibly disappointed by this, and we need an explanation for why they removed the most widely supported regulation in their docket," said Lisa Gilbert of Public Citizen's Congress Watch.
The SEC, for its part, offered no reasons for dropping disclosure. When the Supreme Court opened up the floodgates to corporate money in Citizens United, the justices assumed that such spending would be known by shareholders. “With the advent of the Internet, prompt disclosure of expenditures can provide shareholders and citizens with the information needed to hold corporations and elected officials accountable for their positions and supporters,” wrote Justice Anthony Kennedy for the Court. Yet Kennedy was wrong. There were no disclosure rules in place for this sort of spending. Because the law had banned it, Congress hadn’t required corporations to disclose it. In the 2012 election, hundreds of millions of “dark money” dollars flowed into campaign ads. With Congress hopelessly deadlocked, the SEC was disclosure advocates’ last hope.
The SEC may have been persuaded by the arguments of those, like the Chamber of Commerce’s Blair Latoff Holmes, who insisted the SEC had no business regulating political spending. “Campaign finance reform is not, has never been, and should never be a function of the SEC,” according to Holmes. Brad Smith, of the Center for Competitive Politics, a group opposed to campaign finance reform, said the SEC’s proper focus is “protecting investors and regulating capital markets” not “campaign finance law.”
There is some precedent for the SEC’s regulation of the political activity of publicly held corporations. According to Ciara Torres-Spelliscy, one of the leading experts on corporate disclosure, the SEC has previously acted in this area. She cites the SEC’s 1994 rules adopted to stem “pay-to-play” in the municipal bond market, 2010 rules restricting political fundraising by public pension fund advisors, and investigations into bribery of foreign officials after Watergate that spurred enactment of the Foreign Corrupt Practices Act. Despite that history, it may be that today’s SEC is reluctant to take on a hot-button issue that might infuriate Republicans on Capitol Hill, who control the commission’s purse strings.
While Brandeis would have applauded the efforts of disclosure advocates, he may have been too sanguine about sunlight’s curative effects. No doubt disclosure of corporate political spending would provide useful information some shareholders, especially those hyper-attentive to politics. Media and corporate watchdog groups would be able to expose who is spending what in our elections. Yet in today’s publicly held corporations, shareholders have little real power to control management. It’s extremely rare that shareholders are able to force corporate officials’ hands through proxy voting or breach of fiduciary duty lawsuits. And while some shareholders can sell their shares, that remedy isn’t available to many. Public pension funds often operate under rules that prohibit selling in such circumstances, and individual pension fund investors are penalized for selling early. Disclosure wouldn’t really empower shareholders to stop executives from spending shareholder money on politics.
Disclosure can also have perverse effects. In the 1990s, a similar group of corporate reformers pushed for increased disclosure of executive compensation. The idea was to shame corporate boards from paying executives excessive salaries. The opposite happened. Boards saw what everyone else was paying and, certain that their executives were better than average, paid them accordingly. Executive compensation skyrocketed. The same thing could happen with disclosure of corporate political spending. Although shareholders can’t really do much with the information, the same can’t be said for executives seeking to influence elected officials. They’ll see what others are giving and commit their own firms to give more. Instead of shaming executives, we might see a political spending arms race.
Or maybe not. Due to the SEC’s refusal to require transparency, all we can do is guess about disclosure’s ultimate effect. In the meantime, corporate executives will continue to funnel other people’s money into the electoral process – without those other people ever knowing about it.