InvestmentNews Editorials

Corporate First Amendment rights belong to the shareholders

Mar 2, 2014 @ 12:01 am

If, as the Supreme Court of the United States says, a corporation has the First Amendment rights of freedom of speech, it is the essential responsibility of the Securities and Exchange Commission to make sure the corporate voice is that of the shareholders, not the executives in the C-suite.

The moral hazard presented by allowing a small group of ultrawealthy insiders to direct the secret use of corporate funds contrary to the interests of shareholders is enormous and potentially devastating, not just to shareholder value but to the foundations of our democracy. This is exactly the kind of disclosure requirement that is appropriate for SEC rule making and essential for anyone assessing investment risk.

The SEC lists “investor protection” as first among its duties, followed by the promotion of fair, orderly and efficient markets and facilitation of capital formation. All that rests on the credibility of the market — the belief that investors have enough information to make an accurate evaluation of a company's prospects.

That means that corporate executives can't withhold any information indicating a diversion of corporate assets contrary to the creation of long-term, sustainable shareholder value.

Unfortunately, here as elsewhere, the SEC's priorities indicate a preference for the interests of executives over investors.

According to the Dodd-Frank Progress Report maintained by the law firm Davis Polk & Wardwell, “as of Jan. 2, 2014, a total of 280 Dodd-Frank rule-making requirement deadlines have passed. Of these 280 passed deadlines, 132 (47.1%) have been missed and 148 (52.9%) have been met with finalized rules.”

This is in large part both an example and consequence of exactly the problem that Citizens United v. Federal Election Commission and other rulings have -created, and that the upcoming McCutcheon v. FEC decision could exacerbate. These cases have spawned an avalanche of corporate money spent on lobbying for loopholes and delays.

Many of these rule makings could include essential protections for investors. But executives who want to avoid accountability and transparency spend corporate money to insulate themselves from exactly the kind of oversight that keeps markets vital and competitive.

As a result, the SEC responded to industry pressure to move the JOBS Act rule makings ahead of Dodd-Frank rules, stripped key investor priorities from the official agenda of rules that agencies are required to submit twice a year, but still managed to find time for a lopsided “round table” hearing on the discretionary issue of proxy advisers at the urging of the Chamber of Commerce.

Perhaps investors in Starbucks Corp. would applaud the return on investment from a $60,000 payment to a lobbyist that resulted in an $88 million tax loophole, though it is unlikely that the legislators who created tax incentives for manufacturing intended for the definition to be expanded to include grinding coffee beans.

CONTRIBUTIONS TOXIC

But a Rice University study has shown a “persistent negative relationship” between political expenditures and corporate performance.

A study from the University of Kansas found that for every additional $10,000 a firm contributes, its stock market price drops 7.4 basis points below expectation.

This seems logical, because if corporate executives shape the rules to insulate them from accountability to the market, inevitably, they will take fewer risks and become less competitive. Corporate political expenditures, like any other asset allocation, need to be assessed in terms of return on investment.

The only way to do that is to get the information about how much is spent and to whom it is paid. Given the labyrinth of “dark money” organizations, only the SEC can make sure investors get the information they need.

Investors are happy to put their money where their mouth is, but they shouldn't have to subsidize the secret, self-dealing initiatives of a few corporate chieftains.

The Supreme Court didn't say that a corporation is a person; it said that a corporation is made up of people.

Those people deserve to know how their money is being deployed.

Nell Minow is co-owner and board member of GMI Ratings, which provides data and analysis of corporate governance, accounting and executive compensation.

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