Keeping Shareholders in the Dark; The Securities and Exchange Commission is failing to put investor interests first

December 3, 2013

Keeping Shareholders in the Dark

By THE EDITORIAL BOARD

Protecting investors and ensuring proper corporate governance are the essence of the mission of the Securities and Exchange Commission. But you wouldn’t know that from the recent actions of the agency and its chairwoman, Mary Jo White. Last week, the S.E.C. unwisely removed from its regulatory agenda a plan to consider a rule to require public companies to disclose their political spending — even though the case for disclosure is undeniable. Basic investor protection requires that shareholders know how corporate executives are spending shareholder money. Good corporate governance requires that companies are transparent about their use of corporate resources. Shareholders know this and have demanded disclosure.Even before 2010, when the Supreme Court’s ruling in Citizens United opened the floodgates for corporate political spending, shareholder proposals requesting information on such spending were growing. Since the ruling, those requests have increased along with the political spending. Trade associations and politically active tax-exempt groups are not required to disclose their donors, but there is mounting evidence that much of the money they spend is from companies that want to influence elections in secret, without fear of alienating shareholders, customers or legislators they target for defeat.

The drive for a rule mandating disclosure of corporate political spending began with a petition to the S.E.C. in 2011 from 10 corporate and securities law professors, laying out the legal basis for a new rule. The petition has garnered more than 600,000 comments — more than any other petition or rule in the agency’s history. Most comments are in favor; they include a letter of support from some Democrats in Congress and one from institutional investors who together manage nearly $700 billion.

Equally important, the Supreme Court in Citizens United assumed a role for shareholders in monitoring corporate political spending. It stated that “prompt disclosure of expenditures” would help shareholders hold corporations accountable. It also said that disclosure would help shareholders determine if the corporation’s spending “advances the corporation’s interest in making profits.”

Opponents of the rule, including Republican lawmakers, some conservative academics and trade associations, have said that the S.E.C. should not be involved in issues of campaign finance or free speech. But that is not the point. Without disclosure, shareholders have no way to assess whether corporate political spending benefits them, and every reason to believe it is fraught with risks to the corporate brand, business reputation, the bottom line and, by extension, shareholder returns.

This week, Ms. White told reporters that the S.E.C.’s new regulatory agenda, which mostly includes overdue rulemakings required under the Dodd-Frank financial reform law, reflects her best judgment of what is doable this fiscal year. She was noncommittal about whether the commission would develop a disclosure rule on political spending in the future. One thing is certain: Indefinite delay is a bad sign and sends a terrible message that the agency is reluctant to stand up for what investors need and want.

The S.E.C. has a lot to accomplish and limited resources. But it is an independent agency precisely so that it can set a powerful agenda. Ms. White should put disclosure of corporate political spending back on the agenda without delay.