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Spring Awakening

In business, spring’s arrival coincides with another season, proxy season…

May 8, 2009

Cross-post from The Hill’s Congress Blog.

In business, spring’s arrival coincides with another season, proxy season, in which shareholders receive proposals on which they, or their proxy, will vote at a shareholders’ meeting. A key issue for consideration this year, given the intermingled financial and political scandal that caused the current recession, should be enhanced disclosure of corporations’ political activities.

As an article in Politico recently noted, already 40 of the 100 largest American corporations allow shareholders some access to information on political contributions (in addition to that required by law), either by agreement or shareholder resolution. In some instances, corporations are going beyond what is revealed in public disclosure documents to include contributions to trade groups.

Trade groups and professional associations, or “business leagues,” as the IRS calls them, fall under tax code section 501(c)(6), alongside chambers of commerce and real estate boards (as well as, somewhat oddly, professional football leagues). Trade groups are defined as organizations “united by a common business interest” and “devoted to improving business conditions.”

Since their earliest incarnations, campaign finance rules have been directed to the immense power that can be wielded by corporations in our political process, and restrictions on corporate spending on elections were first enacted by Congress in 1907. As the Supreme Court, citing the “sober-minded” Elihu Root, has observed, such rules “prevent the great aggregations of wealth from using their corporate funds, directly or indirectly to elect legislators who would vote for their protection and the advancement of their interests as against those of the public.”

It makes sense, given both this history and the current need for better information about corporate influence, that 501(c)(6) organizations should be subject to broader disclosure than other types of organizations. Current law allows dues from trade association members to be kept confidential, creating a vehicle to circumvent current disclosure laws.

But nothing prevents more robust voluntary reporting by the contributing corporations, on their own or at the instigation of shareholders. Indeed, such reporting would be aligned with a growing movement that calls for corporations to provide information about their practices that extends well beyond strict financial performance. So-called “triple-bottom line” reporting typically provides information on environmental and social performance, thereby capturing other data relevant to a company’s reputation and brand value that has not been reflected in traditional reports. Alongside information on labor relations and sustainability, then, we suggest that more corporations also report political contributions.

With U.S. taxpayers’ recent investments through bailout funds, the rationale for disclosure of corporate partisan and political spending has only increased. In a letter to Elizabeth Warren, chair of the Congressional Oversight Panel for the TARP funds, the Brennan Center highlighted the need for greater transparency to assure that the economic recovery funds are not used inappropriately for political activity, thus turning our tax dollars into leverage for a self-interested corporation instead of as a tool to boost the economy as a whole. As we noted, “the new role of federal taxpayers in substantially funding these corporations, and the public’s appropriate interest in proper use of the funds, means that far greater transparency is now warranted.”

Disclosure for corporations is right for democracy, and it is also good for business. A corporation that must reveal its donations is far more likely to be selective about who receives them. Public scrutiny therefore makes it more likely that a company will avoid a difficult, share-price-hurting scandal over its political activities.

Disclosure would also help prevent economic distress on a more macro level. In a recent article in The Atlantic, Simon Johnson, former chief economist of the International Monetary Fund, laid out the economic inefficiencies caused by the interdependence of politicians and corporate America.

Johnson observed that corporations “are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive” thereby giving “the financial sector a veto over public policy.” Indeed, this is a self-reinforcing cycle. The increased influence of Wall Street allowed corporations to push more deregulation through Congress, thereby increasing their wealth, which in turn increased their influence and gave them, in Johnson’s words, “enormous political weight—a weight not seen in the U.S. since the era of J.P. Morgan (the man).”

Thus, both as the deregulation-driven bubble expanded, and now, as the economy contracts, corporate influence is exercised for short-term gain, but to their detriment, and the detriment of the economy as a whole, in the long-term. The deleterious accretion and abuse of access to lawmakers is something with which the aforementioned Elihu Root would be familiar. He was, for a period, Mr. Morgan’s lawyer.

Given the harm that can arise from a lack of disclosure, it is little wonder that a 2008 poll conducted by the Center for Political Accountability and the Zicklin Center for Business Ethics Research at the Wharton School found that 88% of members of corporate boards of directors agreed that corporations should be required to publicly disclose all corporate funds used for political purposes. These board members get it—disclosure is good business.

Recently, some in Congress, including Senator Durbin as a co-sponsor, took a brave step towards diminishing special interest influence over Congressional actions by introducing the Fair Elections Now Act, which would establish a grassroots-driven alternative funding source for Congressional campaigns.

In light of the grim national mood and the opportunity provided by proxy season, corporations should also take affirmative steps to rehabilitate their public image. More corporations should increase their disclosure of political contributions, both because it is a hallmark of good corporate citizenship and because it would be good for their bottom line.