The 2016 U.S. presidential election campaign is set to be the most expensive yet, with some sources suggesting a whopping $10 billion in total costs. The huge price tag of the campaigns have put issues of corporate political spending and lobbying to the forefront as we enter proxy season - the period when many companies hold their annual shareholder meetings, making lobbying one of the hottest topics on the agenda of investors.
Why should investors care?
When companies do their political lobbying behind closed doors it threatens both our democracy and ultimately the credibility and trust in a company's own brand.
A key part of an investor's job is to know and understand risk. However in the U.S., as well as many other countries, there are no regulations requiring companies to publicly detail whether they have made direct payments to political parties, candidates, trade associations, special interest groups or lobbyists. This creates a lack of transparency, and increases the risk of corruption.
A lack of transparency also means that companies often don't know what trade associations are doing on behalf of their members. Ford Motor Company is just the latest to join over 100 companies (including iconic brands Microsoft, PepsiCo, Mars, Wal-Mart, and Unilever), which have left the American Legislative Exchange Council (ALEC) which is involved in drafting model state legislation on gun control, Voter ID laws, Stand Your Ground laws, anti-immigration bills, blocking EPA regulations, and reversing state regulations on renewable energy. Similarly, a number of US companies have left the Chamber of Commerce which has spent over $1bn on lobbying since 1998. While new research from InfluenceMap indicates that major oil companies and their trade associations spent over $100m in 2015 on efforts to obstruct and delay climate policy.
Simply put, we believe it is in the best interests of shareholders for companies to be transparent and accountable about whether they use corporate funds to influence regulation - both directly and indirectly.
Investors can shine a light on corporate political spending and lobbying
In the absence of mandatory requirements to disclose such payments the investment community has an important role to play. By engaging companies on these issues it can encourage increased transparency.
For example in 2012 Boston Common raised the issue of lobbying disclosure and due diligence with GlaxoSmithKline (GSK) when we discovered they were funding Heartland, an organization that denied the science backing climate change. In this case, GSK stopped their funding and used this as a case study to build a due diligence process to vet trade association membership and increase their disclosure on public policy positions and trade memberships. In 2013 they followed suit by leaving ALEC.
Many political spending and lobbying disclosure shareholder proposals are filed every year in the U.S. and this has led a number of companies to improve their disclosure. Another example from my firm's experience was the shareholder proposals we filed with Visa in 2012 and 2013 regarding the potential risks to the company's brand if it did not adopt best practice standards for lobbying disclosure. Visa subsequently established board level oversight, implemented due diligence procedures for lobbying disclosure and ended its membership of ALEC.
What to expect in 2016
With election campaigning in full swing, and concerns about the influence of money on politics in sharp focus, it is estimated that this proxy season there could be as many as 100 proposals filed which ask for disclosure of political spending. More than 50 investors have filed over 50 lobbying disclosure proposals including at Oracle and Verizon. At least 20 members of ALEC including Exxon Mobil and Pfizer will receive lobbying disclosure proposals. And there have been over 15 shareholder resolutions filed with fossil fuel companies on the issue of influence over climate policy.
What needs to change?
While levels of disclosure have improved over time, disclosure is voluntary. This means there is no uniform and standardized disclosure and this makes it difficult to completely assess the risks faced and opportunities available. And it isn't just investors who are asking for rules and guidance. A 2015 BDO survey found that 53% of public company board members believe the Securities and Exchange Commission (SEC) needs to develop mandatory disclosure rules for corporate political contributions.
A petition has been brought to the SEC asking for the development of rules that require public companies to disclose political contributions to shareholders. Yet, despite over 1.2 million letters submitted in support including institutional investors, leading academics, state treasurers, and even two former SEC Chairs Arthur Levitt and William Donaldson, Congress last year acted to prevent the SEC from implementing such a rule for the next year. A worrying decision, because when corporate lobbying and political contributions take place in the dark it is not only shareholder value that is put at risk, democracy itself is also weakened. And when that happens we all lose.
The information in this document should not be considered a recommendation to buy or sell any security.