'Tis the Season of the Shareholders

There are moral hazards and agency costs in the allocation of corporate funds. Experience has shown that executives will support policies that diminish shareholder returns. The term "capitalism" refers, after all, to the providers of capital.
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In an editorial on shareholder initiatives on political spending, The Wall Street Journal relies on the favorite dodge of those who cannot make their case on the merits. It claims that shareholders are attacking, even impinging on freedom of speech. On the contrary. Shareholders support the right to allocate the use of the corporate resources to engage in important issues affecting business. We just want to make sure that speech reflects what is best for the business and not for a small group of executives. Our money should be where our mouth is, not theirs. If anyone is trying to squelch speech here, it is corporate executives who do not want to hear from shareholders who want more information about how their money is being spent.

The Citizens United decision that invalidated most restrictions on the use of corporate funds for campaign contributions never said those expenditures had to be secret. Indeed, the decision made it clear that the entire justification for giving corporations the right of free speech was because they are "associations" who represent the views of their owners. To keep the information about those payments from investors, permits companies like WellPoint to funnel $86 million to the national Chamber of Commerce via the American's Health Insurance Plans (AHIP) trade association in order to run attack ads against health reform, contrary to its public statements in support of the law's key provisions. This was in violation of WellPoint's previous commitment to disclose all trade association dues and similar payments. Can anyone really say that it impinges on WellPoint's freedom of speech to require them to tell us what they are saying and how much they are paying to say it?

Other political contributions have led to direct adverse consequences to the company's brand, reputation and finances. When Target made a contribution to a candidate whose economic policies it supported, it found itself tied to the candidate's anti-gay positions as well. All of Target's previous efforts to portray itself as gay-friendly as an employer and as a retailer were overtaken by the picketers who objected to the company's support for the candidate.

Corporate political expenditures, like any other asset allocation, need to be assessed in terms of return on investment. A recent study, entitled "Corporate Political Donations: Investment or Agency?" from Rajesh K. Aggarwal and Tracy Wang from the University of Minnesota and Felix Meschke from the University of Kansas, found that for every additional $10,000 a firm contributed, its stock market price dropped 7.4 basis points below expectation. There was also a correlation between corporations that donated large sums of money and poor governance and agency costs. This is further proof that shareholder initiatives for better disclosure of political expenditures are necessary to make sure that the payments benefit shareholders and do not further insulate executives from the market.

The Journal's editorial board is in favor of the free markets except when executives get a market response they do not like. They write that the only reason shareholders are raising questions at companies like WellPoint is that that insurance companies are "unpopular" as if reputational problems are not a legitimate market response to poor corporate and political strategy. If insurance companies want to be "popular," they should be more responsive to investors and beneficiaries.

If a political expenditure is in the interests of shareholders, the company benefits from disclosure. If the company does not want to disclose it, it should not be made. There are moral hazards and agency costs in the allocation of corporate funds. Experience has shown that executives will support policies that diminish shareholder returns. The term "capitalism" refers, after all, to the providers of capital. The people whose money is being spent are entitled to the information about what candidates and associations are being supported so that they can provide the kind of market response that keeps companies and economies strong.

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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