Regulators Entertain Political Spending Disclosures for Publicly Traded Companies

By on January 18, 2013

On the heels of President Obama’s inauguration, the US Securities and Exchange Commission is contemplating a proposal to force publicly traded companies to disclose their political spending to shareholders.  This proposal follows the most expensive presidential campaigning in US history where both President Obama and Mitt Romney surpassed $1 billion in spending.  The massive fundraising in the recent campaigns was fueled by political action committees or “super” PACs that have dramatically changed the political campaign landscape.  The US Supreme Court’s 2010 decision in Citizens United v. Federal Election Committee spurred the rise of super PACs by finding that the First Amendment prohibited the government from limiting corporation and union political spending in PACs.  Opening the corporate books publicly to reveal what companies are spending and where regarding politics could create a new era of disclosure issues and potential attacks by the public and shareholders on the spending of corporate funds.

Similar to the SEC proposed measure, on a state level on January 2, 2013, the New York state comptroller sued Qualcomm to demand access to its the company’s political expenditures after Qualcomm refused its access.  The company spent about $4.7 million on lobbying last year.  The comptroller has brought the lawsuit on behalf of one of the largest public institutional investors in the country, the New State pension fund.  The claim is brought under Delaware Business Law Section 220 and called a books and records demand.  Often when a books and records demand is satisfied, a shareholder may use the information it gains to make a demand on a company’s board of directors to take action regarding mismanagement or bring a derivative lawsuit with claims that the board of directors breached their fiduciary duties through mismanagement or lack of oversight.  In the instant action, the comptroller maintains that shareholder value depends on how the corporation is spending it, which could pose financial risks.  Several other institutional investors have put forth resolutions concerning corporate contributions following the decision in Citizens United.  The New York state attorney general has also issued a regulation that will force many tax-exempt organizations to disclose their donors.

The proposal to disclose political contributions also follows an SEC measure adopted this summer that requires companies to disclose their use of “conflict minerals” or “blood diamonds” from war-torn central Africa.  Companies are required to report to the SEC annually on what measures, if any, they are taking to ensure those minerals are not funding armed conflict.  This financial reform law was supported by humanitarian organizations that encourage companies to avoid selling “conflict minerals” and “blood diamonds.”   These minerals are harvested in the Congo and other war-torn parts of Africa, where children and adults are exploited by forcing them to work in the mines under brutal conditions for warlords, who receive payments from multinational corporations.  Now shareholders who invest in these companies have more access to the humanitarian efforts these companies are taking and if they are in fact disclosing the appropriate use of these minerals.  The impact of these disclosure measures, along with the comptrollers lawsuit, and the SEC proposal on political spending may cause shareholders to scrutinize corporate spending more closely and hold the company accountable through resolutions, 220 books and records demands, and derivative lawsuits.