“We see political spending as distorting markets in policy making and creating a skewed playing field,” said Bruce Freed, founder of the Center for Political Accountability, in a recent debate over corporate political speech.

Freed’s organization and other leftist groups have been pressuring corporations to eliminate or at least disclose their political spending. But a recent Common Cause study of $220 million in independent expenditures for candidates in California from 2000 to 2012 shows that unions spend much more than businesses.

“[L]abor unions are the largest source of independent spending, focusing primarily on governor’s races,” the study states.

Some findings:

— Union-backed independent expenditure committees outspent business-backed committees three-to-one: $90 million to $27.7 million.

— Three-quarters of the donations exceeding $1 million came from unions.

— Seven unions are among the top 10 donors.

— Business-backed committees accounted for 12.5 percent of independent expenditures.

— Chevron, the largest corporate contributor to independent expenditure committees, ranked 28th among all donors.

Professors target corporate speech

But a political playing field skewed in favor of unions hasn’t deterred a group of law professors from filing a petition with the Securities and Exchange Commission that has the potential to significantly decrease corporate political spending.

“We ask that the Commission develop rules to require public companies to disclose to shareholders the use of corporate resources for political activities,” the July 2011 petition states.

It makes several assertions:

— Public investors have become increasingly interested in receiving information about corporate political spending.

— In response, a large number of public companies have voluntarily adopted policies requiring disclosure of the company’s spending on politics.

— Disclosure is important for the operation of corporate accountability mechanisms, including those that the courts have relied upon in their analysis of corporate political speech.

Fifty of the 465 shareholder proposals on company proxy statements in 2011 were related to political spending, including one-fourth of the S&P 100, according to the petition.

The petition addresses the pro-corporate speech argument that there are already numerous regulations governing corporate political spending. It states that the information is scattered “among several federal, state and local government agencies, presented in widely varying formats, and is ill-suited to giving shareholders a good picture of a particular corporation’s political spending.”

And much information remains undisclosed, the petition states, including contributions to intermediaries like 501(c)(4) organizations that are not required to disclose their donors. The petition concludes:

“Shareholders in public companies have increasingly expressed strong interest in receiving information about corporate spending on politics, and such spending is likely to become even more important to public investors in the future. Furthermore, shareholders need to receive such information for markets and the procedures of corporate democracy to ensure that such spending is in shareholders’ interest. Still, while many large public companies have begun to provide such information, no existing rule requires disclosure of this information to investors, and corporate political spending remains opaque to investors in most publicly traded companies. The Commission should address this lack of transparency and, drawing on its expertise and experience in designing rules for disclosure of other information that is of interest to investors, should adopt rules concerning disclosure of corporate political spending.”

Not a priority for SEC — so far

The SEC has yet to act on the petition, and may take its time doing so. The petition was recently placed in the long-term action category of the “reg flex” agenda, said SEC general counsel Brian Cartwright at the Society of Corporate Secretaries & Governance Professionals conference.

“If I were advising [SEC Chairman] Mary Jo White, and she decided this is something she was not interested in, I would advise her to put it in the long-term action category rather than take it off the reg flex agenda altogether,” said Cartwright. “Because you would have to take a whole bunch of arrows you don’t need to take if you do that. So I would say for the near term this has been very substantially downgraded for SEC action. This late in the year nothing could impact the 2014 proxy season.”

When the petition does reach the SEC board, at least one commissioner, Daniel M. Gallagher, may be skeptical, judging by his remarks at the SCS&GP conference on July 11. He agreed that there are benefits for investors from more disclosure, but he draws a tighter line on how much needs to be disclosed.

“[T]he disclosure regime was [not] meant to guarantee that investors receive all information known to a public company, much less to eliminate all risk from investing in that company,” said Gallagher. “Instead, the point has always been to ensure that they have access to material investment information.”

‘Regulatory creep’ leads to information overload

He went on to say:

“Arguably, the Commission’s disclosure regime has been subject to the classic Washington scourge of regulatory creep, in spite of the principle that investors should have access to ‘basic facts.’ The beauty of the disclosure regime as created by Congress almost 80 years ago was that it did not require government regulators to judge the merits of a company, its board or management structure, or its business practices –– those judgments were intended to remain in the hands of investors armed with the knowledge provided by the disclosure of material information. Today, however, some of our disclosure rules are being used by special interest groups, who do not necessarily have the best interests of all shareholders in mind, to pressure public companies on certain governance and business practices.”

Gallagher also warned about the potential for information overload:

“As Justice Thurgood Marshall warned almost 40 years ago, disclosure requirements with ‘unnecessarily low’ materiality standards risk ‘simply bur[ying] the shareholders in an avalanche of trivial information — a result that is hardly conducive to informed decision making.’ When investors are inundated with immaterial information, it increases the likelihood that they will miss key disclosures. Even more likely is the possibility that investors, despairing about the voluminous compilations of corporate minutiae contained in company filings, will never even look at disclosure documents. In either case, the result is that investors are left less informed when making investing decisions than they would be if presented with a document that didn’t require a magnifying glass to read and a PhD to understand.”

The quantity and length of the documents needing to be reviewed by shareholders has increased by about 50 percent from 2003 to 2011, he said. As a result, Gallagher pushed for streamlining regulations.

“Given the importance of this issue, it is critical for the Commission to engage with issuers and shareholders to rethink whether the mandatory disclosure rules in their current form are still valuable, and whether in some cases it may be better for investors if there was a lower volume, but an overall higher quality, of disclosure,” he said. “As I’ve noted repeatedly, disclosure is not costless to issuers, and we cannot forget — because far too many policy makers do forget — that it’s the shareholders who ultimately bear the burden of increased costs on issuers.”

Overreach of SEC authority seen

Former SEC Commissioner Paul Atkins is strongly opposed to the disclosure petition. He discussed the issue at a Pacific Research Institute luncheon in San Francisco last year, and wrote a petition response, “Materiality: A Bedrock Principle Protecting Legitimate Shareholder Interests Against Disguised Political Agendas.” It makes several arguments:

— The SEC does not have the authority to require disclosure of information on these sorts of expenditures because such information is immaterial.

— Should the Commission decide to proceed, which would harm rather than protect investors, the Commission would be unable to satisfy its legally mandated cost-benefit analysis because the alleged benefits are outweighed by the significant costs of mandated disclosure.

— It would be inappropriate for the Commission to move forward with a rule-making related to corporate public policy spending at a time when it must address myriad issues related to the financial crisis of 2008, as well as those that are central to the economically important capital-raising functions of the capital markets.

“Ultimately, the SEC is not the appropriate body to address this issue, primarily because SEC does not have the authority to require disclosure of information on these sorts of immaterial expenditures,” wrote Atkins. “Rational shareholders, considering their economic interests and not political interests, do not consider this information material to their investment decision making.

“Even if the SEC were to forge ahead and consider a rule, an impartial economic analysis of the costs and benefits of such a requirement would find that the costs exceed the purported benefits, because the narrow interests of an extremely vocal minority of shareholders (and even non-shareholder activists) could more easily intimidate value-creating corporate behavior, create brand damage to the disclosing companies, and stifle corporate speech, all of which would have a detrimental economic effect on the company and its shareholders.”

One of the disclosure advocates, Freed, suggested that he might not be bothered were the SEC to reject the disclosure petition.

“I think when you’re looking at the work we have done on political disclosure, we are not talking about regulations,” he said. “We are talking about companies adopting policies that govern their political spending practices. This is very, very important. Voluntary disclosure as a result of shareholder engagement has laid a strong foundation for broader disclosure.”

Even if SEC passes, state-level action proceeding

But if the petition is rejected, corporations won’t be able to breathe easy. Disclosure advocates have started lobbying state legislatures.

“At the state level there’s quite a bit of ferment,” said Freed. “Disclosure laws have passed in Iowa and Maryland. There’s strong support for disclosure legislation in Texas and Montana. The Texas legislature passed a very strong disclosure bill that was vetoed. In Montana there was very strong bipartisan support. In New York state, regulations were issued by the attorney general requiring  501(c)(4) disclosure. California is getting very active in this area. So there’s quite a bit of ferment there.”

Between the fomenting from disclosure activists and the regulatory fermenting in state legislatures, free market supporters will need to stay alert lest the already-skewed political playing field be totally forfeited to one team.

This is the first article in a two-part series on the battle against corporate political speech.

The U.S. Supreme Court’s Citizen’s United decision in 2010 affirmed the right of businesses, associations and unions to freely engage in politics. Since then, leftist groups have increased the pressure on corporations to eliminate or at least disclose their spending on candidates, ballot measures, political action committees, trade associations and the like.

But when corporations cave in to such pressure, they open themselves to the possibility of boycotts and protests from leftist groups that disagree with something a candidate says or an association does.

Whether the pressure campaign has been effective — and whether corporations would be committing suicide by going along with it — were topics debated at a recent conference of the Society of Corporate Secretaries & Governance Professionals.

Bruce Freed, president and founder of the Center for Political Accountability, has been in the forefront of the corporate pressure campaign. His group publishes an annual index that tracks large U.S. companies’ policies on political spending. CPA also pushes corporations to adopt its model political disclosure resolution. It calls on companies to:

* Report soft money contributions, independent expenditures and payments to trade associations and other tax exempt organizations that are used for political purposes.

* Identify the titles of the individuals involved in the expenditure decisions.

* Disclose their political spending guidelines.

* Require the board of directors to conduct oversight of the company’s political spending.

Belly of the beast

Freed went into the belly of the beast on July 12 to urge a room full of corporate pros to do just that.

“Why has political disclosure become such an important issue to both companies and shareholders?” he asked. “I think it can be summed up in one word: risk. Over the past several years shareholders and companies have come to recognize that political spending using corporate treasury funds poses a range of risks. Those risks are reputation, business and legal. A serious problem exists today with the rise of 501(c)(4) groups. We have a real threat of extortion and shakedown. Because those groups, the 501(c)(4)s, do not disclose their donors. They are really conduits for secret political spending.”

Freed assured his audience that their companies would not be the only ones disclosing their political spending.

“What’s interesting today is that political disclosure has become a mainstream corporate practice,” he said. “Companies in ever-growing numbers are adopting disclosure and accountability policies. As of today, 118 companies — these are large companies in the S&P 500 and over half of the S&P 100 companies — have reached disclosure agreements with CPA and its partners…. [A]bout three-fourths of the companies in the S&P 500 do have policies of some sort on political spending.”

And Freed argues that transparency is good for business.

“Our experience has been that there’s no question that disclosure is good for companies and shareholders,” he said. “It allows them to know what companies are spending directly and indirectly. We have found through our surveys that directors do not necessarily know their company’s political spending. We’ve also found in discussing with companies that political disclosure really has not had serious consequences, has not led to pressure from shareholders and various stakeholders. It hasn’t led to requests for more contributions. I think we are at the point now where we find that standardized disclosure creates a level playing field. That’s something that we are finding more companies are saying to us that they want.”

Focus is on corporate speech

Although Freed argued against political spending in general, it appears that it’s mostly corporate political spending that concerns him.

“We see political spending as distorting markets in policy making and creating a skewed playing field,” he said. “That’s one of the reasons why we have been pressing companies to disclose their political spending. To at least have it out there for shareholders, others, even for directors and management to know the full extent of the company’s political spending. I think you can look at political spending and see … that it really can create problems for a well functioning market economy.”

Freed summed up his opening statement with “two important takeaways. The first is that the steady growth in the number of companies adopting disclosure and accountability is making it a corporate governance standard. We have critical mass today.

“Secondly, it’s in a company’s self interest to have robust disclosure and accountability policies. With the rise of 501(c)(4) groups, with the rise of trade associations engaged in political spending and doing it with anonymous funding, disclosure is very important in helping to protect companies from risk and it also leads to considered decision making.”

Different planets

Freed’s debate opponent Brian Cartwright, a former general counsel at the Securities and Exchange Commission, opened by saying, “It may appear that Bruce and I come from different planets. We couldn’t diverge more in our views. There’s little that he said with which I agree. I just have to set the scene as to what is really going on here from my perspective.”

Cartwright argued that businesses would be crazy to kowtow to the pressure from what he called “the anti-business community.”

“I start from the premise that the government is large enough at all levels — local, regional, state and federal,” he said. “It’s pervasive enough, it’s intrusive enough that the business community has really little choice but to engage with the government. Whether business thrives, or sometimes whether it survives, often depends on what the government does and doesn’t do. We all know that. So as a pragmatic matter you have to engage with the government; the business community does.

“The folks who view themselves as usually adverse to business — not always, but usually; the big labor federations, the trial lawyers and others, you know who they are — have got lots of money. They have got lots of manpower. They are very sophisticated. And they are very aggressive, as you all know, in their involvement in electoral politics. So, the business community really can’t afford to cede the field to them. Because if it does, it’s just going to get rolled.”

Targeting Target

The 2010 boycott against the Target Corporation is an example of what can happen when corporations engage in political spending and disclose it. The retail giant contributed $150,000 to Minnesota Forward, a pro-business group that supported the campaign of a gubernatorial candidate who opposed gay marriage. After gay-rights groups launched a boycott, Target apologized for the contribution and promised to make amends by focusing on diversity and inclusion in the workplace. The boycott then fizzled out.

“The anti-business community wanted to use this as an opportunity to send a message broadly as to what can happen to you if you participate in politics,” said Cartwright. “Target emerged unscathed. Undoubtedly they had an episode they had to manage that they would rather not have managed. And these incidents have been few and far between. So on a probability basis, your likelihood of having to face something like this isn’t too great. Nonetheless, you’re on notice. It’s kind of, ‘Nice business you have there — it would be shame if anything should happen to it.’”

The corporate pros nervously laughed.

Cartwright concluded his opening remarks:

“So if you want to, capital T, target companies in order to dissuade them from entering the political process at all, it poses at least a modest obstacle. So they would very much like to overcome that. I think it was Lenin who said a capitalist is the guy who will sell you the rope to hang him. Here they are suggesting, not that they buy the rope, but that you give it to them. Because they want the disclosure that will enable them to at least threaten to, capital T, target you.

“The ultimate goal here … is to remove the voice of business from the playing field. That strikes me as almost obviously not in the best interest of companies and therefore indirectly their investors and stockholders, at least those who are not conflicted with another agenda.

“So why would anybody do it? I don’t think anybody really would. But the pitch … is that ‘resistance is futile.’ That’s supposedly because of two things. First, all your peers are doing it. And then arguing in the alternative, second, ‘If they are not doing it now, they will be soon. This wave is unstoppable. So you don’t want to be an outlier, do you? That will expose you even more. So why don’t you get on board with the program?’ That is very much the pitch. I’m here to say that all your peers aren’t doing it, this wave is not unstoppable and it is not in the best interest of stockholders.”

Doing it

The largest part of the debate concerned whether everybody is in fact “doing it.” Freed said shareholder support for political disclosure policy proposals has risen from 9 percent in the 2004 proxy season to more than 30 percent now. Boeing jumped from 22 percent support in 2011-12 to 29 percent this year.

“The experience is that there has been a significant increase,” said Freed.

Freed’s numbers are based on counting just the “for” and “against” votes on disclosure resolutions. Cartwright countered that with a slide using statistics that also include abstentions on those resolutions. It shows that there is very little support (18 percent) for limiting corporate political speech, the same as what it was in 2006.

“These [anti-corporate] proposals get clobbered every single year,” Cartwright said. “The overwhelming rejection by shareholders of these proposals is manifestly evident.”

The debate ended with Cartwright stating something that both he and Freed could agree on.

“It does make sense for the board to have some monitoring supervision of this,” said Cartwright. “It does makes sense to have internal policies that guide the activity in this area as in many others.”

To listen to the debate, click here, or on the YouTube below.

Next story: Leftists seek SEC regulation of corporate speech.