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How the Biden Administration Can Increase Transparency for Corporate Political Spending

Shareholders have been clamoring for more openness about corporate political spending and on environmental, social, and governance issues.

It’s finally time to turn on the lights. For over a decade, there have been grow­ing calls for trans­par­ency and account­ab­il­ity regard­ing corpor­ate polit­ical spend­ing and other ESG (envir­on­mental, social, and governance) issues from investors who are tired of corpor­a­tions hiding the ball. These calls did not make an impact on the Obama admin­is­tra­tion, which failed to issue better rules when it had the chance, and these pleas were actively ignored by the Trump admin­is­tra­tion, which pushed corpor­ate account­ab­il­ity further out of reach. The Biden admin­is­tra­tion may finally be respons­ive to these demands for sunlight.

Investors have been complain­ing to Amer­ican publicly traded compan­ies about the lack of trans­par­ency for years. Fortu­nately, there are already encour­aging signs that the Secur­it­ies and Exchange Commis­sion (SEC) and the Depart­ment of Labor — which have been hamstrung for years — will finally act. Indeed, the Biden SEC has already indic­ated that it will take action on ESG issues at publicly traded compan­ies to help protect share­hold­ers and that the commis­sion welcomes comments from the public. Moreover, SEC Commis­sioner Caroline Cren­shaw penned a piece on Monday indic­at­ing that it was time for Congress to let the SEC make disclos­ure rules for corpor­ate money in polit­ics. And there are also encour­aging move­ments at the Labor Depart­ment. Both could be steps toward getting clar­ity on polit­ical spend­ing at long last.

It’s worth asking: do share­hold­ers really give a damn about corpor­ate polit­ical spend­ing?

They most certainly do. Investors have submit­ted share­holder propos­als asking for trans­par­ency of such spend­ing since even before Citizens United. And these share­holder propos­als continue to be popu­lar nearly a decade later. As corpor­ate governance tracker Equilar repor­ted in 2019, “The largest percent­age of social propos­als . . . concern the dispens­a­tion of discre­tion­ary funds used in lobby­ing activ­it­ies, polit­ical contri­bu­tions and char­it­able dona­tions. . . . A major­ity of these polit­ical and lobby­ing-based share­holder propos­als have to do with polit­ical dona­tion trans­par­ency.”

And as SEC Commis­sioner Cren­shaw noted in her recent piece, “[i]nvestors have repeatedly reques­ted inform­a­tion on polit­ical spend­ing — last year, share­hold­ers voted in favor of greater disclos­ure 80% of the time that ques­tion was on a corpor­ate ballot.”

What explains the popular­ity of share­holder propos­als on this campaign finance issue? For starters, in the decade since Citizens United, the SEC has dropped the ball and failed to advance a rule that would require compan­ies to inform their investors about their polit­ical expendit­ures. And the Labor Depart­ment under Trump intro­duced a hostile rule under the Employee Retire­ment Income Secur­ity Act (ERISA) that barred certain investors from consid­er­ing ESG factors when making invest­ments for pension funds.

Without federal rules in place compel­ling corpor­ate disclos­ures, share­hold­ers have had to slog it out company by company asking for trans­par­ency through what is known as “private order­ing.” After private order­ing, 292 publicly traded compan­ies are more trans­par­ent about their polit­ical expendit­ures today than they were a decade ago.

There is clearly a strong appet­ite for more clar­ity about how publicly traded compan­ies spend money in polit­ics, as evid­enced by the high votes that share­holder propos­als on polit­ical spend­ing have received in the past proxy season. As the Harvard Law School Forum on Corpor­ate Governance recently repor­ted, “Over the last few years, investors have increas­ingly been focus­ing on polit­ical contri­bu­tions and lobby­ing expendit­ures of corpor­a­tions, demand­ing more trans­par­ency on these issues. Five resol­u­tions that went to a vote in 2020 passed, while a dozen more barely missed the major­ity support threshold.”

To put this in context, receiv­ing over 50 percent of the vote — or even near it — in favor of a share­holder proposal is a big deal, given how shares in compan­ies are held. Founders of firms often reserve a huge percent­age of shares so that they can main­tain control of the firm, and they are unlikely to vote for more trans­par­ency. That means in order to win a large share of votes, the share­holder proposal must be wildly popu­lar among both small and large investors alike. As Fortune reports, calls for sunlight on corpor­ate polit­ical spend­ing is gain­ing steam.

Beyond polit­ical spend­ing, investors have also been call­ing for better disclos­ure of other ESG matters, espe­cially those related to climate change. As the book The Triumph of Doubt: Dark Money and the Science of Decep­tion shows, the issues of corpor­ate polit­ical spend­ing and the envir­on­ment inter­sect at many firms. For example, a publicly traded oil company may spend untrace­able dark money support­ing politi­cians who in turn back policies that are detri­mental to the envir­on­ment — ulti­mately making the task of address­ing climate change all the more ardu­ous. And it becomes a trans­par­ency prob­lem because investors cannot track where this dark money ends up. Given the risks, some investors use ESG metrics to help decide which company is a good invest­ment in a world with a chan­ging climate, but a Trump-era 2020 Labor Depart­ment rule fenced out this line of inquiry for some investors.

Under the Biden admin­is­tra­tion, however, remed­ies are on the hori­zon. To begin with, the Labor Depart­ment has decided not to enforce the Trump-era rule that made ESG an out-of-bounds consid­er­a­tion for those who run employee bene­fit plans. The depart­ment explained, “Stake­hold­ers have . . . ques­tioned whether the depart­ment rushed the rule­mak­ings unne­ces­sar­ily and failed to adequately consider and address the substan­tial evid­ence submit­ted by public commenters on the use of envir­on­mental, social and governance consid­er­a­tions in improv­ing invest­ment value and long-term invest­ment returns for retire­ment investors.” Once a new rule is intro­duced, investors who run pension plans should have new (and hope­fully better) guid­ance on ESG decisions.

Mean­while, on March 4, the SEC announced the estab­lish­ment of a Climate and ESG Task Force in the Divi­sion of Enforce­ment, which will exam­ine whether publicly traded compan­ies are being honest with investors about climate change risks as well as eval­u­ate “disclos­ure and compli­ance issues.” SEC Acting Chair Allison Herren Lee stated, “Climate risks and sustain­ab­il­ity are crit­ical issues for the invest­ing public and our capital markets.” A 90-day comment period is open at the SEC which is seek­ing input on how the commis­sion should deal with climate change disclos­ures in partic­u­lar.

Presum­ably, if the task force finds gaps in the disclos­ure rules them­selves, they could recom­mend more trans­par­ency require­ments from the SEC on ESG issues. We don’t know if this will actu­ally happen or how broad disclos­ure could be. But given that the most popu­lar ESG disclos­ure request from investors over the past decade has been about polit­ical spend­ing, this could lead to corpor­ate campaign finance disclos­ures for publicly traded firms.

A final boost for taking ESG more seri­ously came from John Kerry in his role as the U.S. climate envoy in the Biden White House. Kerry is appar­ently meet­ing with lead­ers in the finan­cial sector to encour­age invest­ment in green energy and green jobs. Kerry poin­ted to the popular­ity of ESG invest­ing as a reason why a market-based approach to envir­on­mental stew­ard­ship could work.

He’s right. And hope­fully the SEC is listen­ing too.

The views expressed are the author’s own and not neces­sar­ily those of the Bren­nan Center.