Paul Hodgson: Are large investors out of step on corporate political spending disclosure?

Although over 70% of US retail investors are in favour of companies they invest in disclosing their corporate political spending, the institutions that vote the shares of these individual investors nearly always vote against shareholder proposals that require such transparency. This is according to a letter from SEC Commissioner Robert Jackson to Carolyn Maloney, the Chair of the House Subcommittee on Investor Protection, Entrepreneurism and Capital Markets. 

Maloney had written to Jackson to enquire about the need for legislation to enforce political spending disclosure, and Jackson – who had been conducting research into the issue – responded with the findings from his Office’s study.

There has been a proposal before the SEC to enforce disclosure since at least 2011, but Congress has used the appropriations process to block the SEC from introducing regulations.

According to the Jackson study, three of the largest four institutions (BlackRock, Vanguard and Fidelity) vote 'yes' less than 5% of the time in support of political spending disclosure resolutions. The fourth largest, State Street, voted in favour around 27% of the time, indicating that some decision-making process – case by case – is likely involved. 

The study also showed that there is “virtually no variance by company or over time, although one could imagine the strength of the case for disclosing political spending to vary depending on the circumstances,” among the top three funds. 

Jackson’s office also examined these institutions’ proxy voting guidelines, but found little disclosure of what those might be regarding these specific proposals.

For example, the letter says: “Vanguard has voted investors’ money against disclosing such spending across 817 shareholder proposals without ever voting in favour of transparency. That record suggests that Vanguard has determined, as a matter of policy, to vote against such proposals. Yet Vanguard’s proxy-voting guidelines do not disclose such a policy; indeed, they say nothing on this subject.”

More specifically, the study looked at institutional votes on 817 shareholder proposals on lobbying and political spending over a fifteen-year period in ISS’s Voting Analytics database.

It found that BlackRock voted in favour of these proposals less than 2% of the time and, as stated earlier, Vanguard voted for none. Neither Vanguard nor Fidelity would comment on the letter or the findings of the study.

BlackRock referred RI to its statement in January on political spending disclosures. In fact, the study found that only BlackRock had a proxy voting policy regarding such proposals. 

The paper from the stewardship department at BlackRock describes its approach to decisions on voting on these resolutions. It considers a company’s existing governance framework, current disclosure, how relevant the disclosures are to shareholders’ investment decisions, significant threats to shareholders, and the level of specificity in the proposal. 

While the fund does not support overly prescriptive proposals, this last potential objection appears to be aimed at those which request a shareholder vote to approve such expenditures.

But the best practices that the fund recommends for issuers to follow are merely compliance with current regulations.Such a recommendation does not take into account the views of, potentially, a majority of its investors who appear to believe that current regulations are insufficient.

However, the fund notes that it is the duty of board and management to determine voluntary disclosures, it merely ensures it is transparent about its policies and encourages companies to make the disclosures as easy to find as possible.

At least BlackRock is clear about its voting guidelines.

However, the letter concludes that: “Contrary to those investors’ preferences, three of the largest institutional investors in the United States consistently vote to keep corporate political spending in the dark. American investors deserve to know that.”

More recently (the letter was sent on 18 November) Jackson published, along with Lucian Bebchuk, James David Nelson and Roberto Tallarita, an academic paper: The Untenable Case for Keeping Investors in the Dark. The paper rebuts almost every argument against political spending disclosure, for example that “the adoption of a disclosure rule by the SEC would violate the First Amendment”. 

The paper purports to demonstrate that the objections to disclosure do not provide, either individually or collectively, a sound argument to obstruct the SEC proposal.

At the same time, The Harvard Law School Programme on Corporate Governance announced the publication of two additional papers addressing political disclosure. 

The Politics of CEOs by Alma Cohen, Moshe Hazan, Roberto Tallarita and David Weiss found that political contributions made by CEOs of S&P 1500 companies from 2000 to 2017 display substantial partisan preferences in support of Republican candidates. In addition, it found that public companies led by Republican CEOs “tend to be less transparent to investors with respect to their political spending.”

The third paper, by Jonathan Macey and Leo Strine, the former Chief Justice of the Delaware Supreme Court, supplements the minority arguments in the Supreme Court case Citizens United v. FEC; the infamous ‘corporations are people’ case. 

The paper takes issue with the minority opinion written by Justice Stevens because it does not challenge the majority’s “existential conception of the corporation”. 

Rather, the paper argues, a corporation is not an “associations of citizens” but an “artificial, metaphysical, and legal construct that exists separate and apart from its investors”.