Paul Hodgson: The ‘double legitimacy’ problem of corporate political spending

The chief justice in Delaware’s supreme court says investors are being wilfully blind to the problems of lobbying cash.

“The regulatory playing field is harmful to them, as humans who suffer as workers, consumers, and citizens when companies tilt the regulatory process in a way that allows for more pollution, more dangerous workplaces, less leverage for workers to get decent pay and benefits, and more unsafe products and deceptive services.”
The words of a progressive socialist?
No, this is taken from the abstract of a new paper, Fiduciary Blind Spot: The Failure of Institutional Investors to Prevent the Illegitimate Use of Working Americans’ Savings for Corporate Political Spending, by Leo Strine, the chief justice in Delaware’s supreme court.
Strine’s theory is that there is a ‘double legitimacy’ problem infecting corporate political spending; the Big 4 – BlackRock, Vanguard, State Street and Fidelity – allow corporate managers to spend what he calls “worker investors” capital without constraint, something, it says, neither has any legitimacy to do. ‘Mutual Funds Don’t Have Worker Investors’ Capital for Political Reasons’ and ‘Public Corporations Don’t Have Equity Capital Because They Are Instruments For Stockholder Political Sentiment’ are two section headings. Strine observes the Big 4’s increasing clout and skepticism of management, but calls out their excessive deference, except for State Street, when it comes to political spending. Worker Investors invest in mutual funds, says Strine, for the purposes of putting their kids through college and obtaining a comfortable retirement. Their political views are as diverse as the whole of the American public, but a majority believe that corporations should not spend money for political purposes at all, and, at the very least, should obtain shareholder approval of any spending. For the same reasons the Big 4 have policies that ‘prevent’ them from making decisions about any political activity – saying ‘it’s got nothing to do with us’ – corporations have no authority to spend the capital invested in them by the Big 4 for political purposes.However, Strine says that the Big 4 have wilfully blinded themselves by not supporting spending disclosure proposals. Not having the information prevents them from being able to make the decisions their voting policies require them to, or even asking whether the money is well spent? None of the Big 4 even supported the SEC’s proposal to mandate disclosure. Even if the information was available, Strine also alleges that they would not be able to analyse it properly as they simply don’t have the time.

“They let corporate management spend the Worker Investors’ entrusted capital for political purposes without constraint”

He also makes a series of arguments outlining why political spending – although it may result in higher profits for some companies – does not benefit diversified investors. One example is spending to support candidates who deny the science of climate change so that subsidies to fossil fuel companies can be continued. Oil companies thus have higher profits but a diversified investor suffers because of the “huge economic and social costs that will come from a failure to keep climate change within bounds”. He also points to studies that show companies with high political spending generally have lower returns since they seek to make money by controlling regulation and currying favour rather than designing superior products.
His conclusion, however, is not to have the Big 4 support disclosure, but to support proposals that prevent corporate political spending without supermajority support; a proposal that originally came from Jack Bogle, Vanguard’s founder. Strine says: “they must… put on their fiduciary boots and do the hard work of representing their Worker Investors”.