The public gets it. Academics and financial analysts get it. In fact, many experts say it is the most important governance and democracy issue of our time. So why do investors have so little to say about political donations and the corporate capture of politics?
It is the number one concern for 38m members of the Avaaz campaigning community, before climate change or income inequality, and the SEC had more than 1m pro-disclosure comments.
Harvard’s John Coates has documented the hidden costs of US-style “crony capitalism”.
In a poll of US members of the CFA Institute, 60% said donations should be reported and a substantial minority (27%) thought companies should not be allowed to make donations. Only 13% said business as usual was acceptable (13%).
Leo Strine, chief justice of the Delaware Supreme Court, was moved to write a paper explaining how the conservative majority of the US Supreme Court, in pushing through Citizens United, have put investors in a tight spot. Either investors oversee corporate political donations, which would be challenging even with mandatory disclosure, or they accept shareholder value primacy has gone too far.
Current levels of corporate political capture have some real costs:
• Corporate donations correlate with poorer quality of accounting information, delays in detecting fraud and other agency problems creating risks that are difficult to evaluate. These risks are then passed on to end-beneficiaries.
• More frequent corporate and market ‘preventable surprises’, such as major accidents in the oil industry, climate change, bee colony collapse and the previously ‘too big to fail/jail’ banks, which are now even bigger.
• Worsening political polarisation and consequent gridlock.
Disclosure of corporate political donations is one antidote to what the shareholder activist Bob Monks calls “corporacy” – a society dominated, both politically and economically, by large corporations.
The good news is that this is a fast-growing issue for AGMs in the US. From a paltry 9% in 2004, mutual funds now vote 39% in favour of political contributions resolutions sponsored by the Center for Political Accountability.
The bad news is that the vote against has remained around 50% for the past five years, with prominent adherents of PRI, such as BlackRock and Fidelity, apparently voting 100% with management, or effectively so, with fewer than 10% votes against as at Putnam and T Rowe Price. The absence of public leadership by mainstream investors allows apologists for the status quo to argue that investors are not really concerned.
Moreover, the disclosure of political donations is no panacea; indeed, CEO pay disclosure has probably made the problem worse. Investors and others need to act on what is disclosed, rewarding companies that behave responsibly and censuring those who do not.
Some investors outside the US may think this is not their problem but corporate capture of politics is near-universal today, as was recognised by new policy from the International Corporate Governance Network in 2012.
Non-US companies that operate in the region tend to adopt local practices, enabling US trade associations, such as the Chamber of Commerce and National Association of Manufacturers, to do what they do. Non-US investors must engage with their national companies to ensure consistent standards in developed markets. If these investors are competent to own US stocks, they should be competent at stewardship, too.
Corporate political influence is not the only big governance issue but it warrants much more attention than investors are giving it today, both in the US and elsewhere.
Raj Thamotheram is an independent strategic adviser, co-founder of PreventableSurprises.com and president of the Network for Financial Markets