California offers a case study of the best and the worst in corporate political disclosure. Some of its companies are leaders, fully disclosing their direct and indirect political spending. Others, however, are opaque.
As a result, the public and shareholders can track the political spending of the forward-thinking companies but are kept in the dark about the laggards. The disparity highlights the need for uniform disclosure by publicly held companies of their political spending with corporate funds.
The vivid contrast between the best and the worst California companies for political disclosure is spotlighted by an annual benchmark called the CPA-Zicklin Index.
It is produced by the Center for Political Accountability and The Wharton School's Zicklin Center for Business Ethics Research at the University of Pennsylvania. This year, it found that almost one-third of the 16 corporations with the highest scores are from California. They include Qualcomm, Gilead Sciences, Wells Fargo, Intel and PG&E.
The Index also found that California companies account for nearly 20 percent of the 49 corporations ranked at the bottom of the national survey, disclosing little or nothing about their political spending.
Why does this matter? California has witnessed some of the highest political spending in the United States.
In 2012, $477 million was spent by supporters and opponents on California ballot measures alone. Much of this money came from corporations, some of it contributed directly but much of it given indirectly through third-party groups - trade associations and 501(c)(4) "social welfare" organizations that aren't required to disclose their donors. Recently, California imposed the largest campaign fine - $1 million - against two 501(c)(4)s for secret spending.
The bottom line: California voters are left blind as to what numerous companies, including many headquartered in the state, are spending politically. And Golden State shareholders can't assess the risks that their companies - and they as investors - may face as a result of political spending.
It shouldn't be this way. While the U.S. Supreme Court's 2010 Citizens United decision affirmed the first amendment right of companies to engage in political spending, it also affirmed that corporate political disclosure is of critical importance to shareholders and the democracy. "The First Amendment protects political speech; and disclosure permits citizens and shareholders to react to the speech of corporate entities in a proper way," Justice Anthony Kennedy wrote.
Disclosure protects companies and shareholders from risk - reputation, legal and business. Companies that do not disclose their spending are prime targets for shakedowns from powerful political figures and 501(c)(4) groups associated with them.
Today, as a result of a CPA-led effort, more than 100 major corporations, including almost three-fifths in the S&P 100 index, have reached voluntary agreements with shareholders to disclose their spending. What's needed is a level playing field where all companies disclose.
There is another route to achieving truly meaningful disclosure, and that is to make it uniform and universal for public companies. The Securities and Exchange Commission, the agency responsible for protecting investors, can do this by granting a petition filed in August 2011 by a bipartisan group of prominent law professors. The petition would require public companies to disclose their direct and indirect political expenditures.
Public support for the petition has broken records, with the commission receiving more than 600,000 comments endorsing disclosure. On Thanksgiving eve, however, SEC Chairman Mary Jo White quietly removed it from the agency's 2014 proposed rulemaking agenda. Her reason: the commission needed to focus on a more immediate to-do list.
Hopefully, the delay will only be temporary. The rule would not be a radical step; it would only codify what is becoming a mainstream corporate practice. As the CPA-Zicklin Index found, 78 percent of the 195 companies that were reviewed improved their overall scores for political disclosure and accountability between 2012 and 2013. The average score for the entire group jumped from 38.2 to 50.7.
Companies are engaging in voluntary political disclosure because they believe it's a good business practice. They also see political participation and disclosure going hand-in-hand. Disclosure doesn't stop them from engaging in electoral politics; it helps them better manage their activity and the risk that accompanies it. As for shareholders, disclosure gives them the ability to know what their companies are doing and to assess the risks.
Secret political spending continued to surge in 2012, and it's not going away anytime soon. The SEC must act as soon as possible to make corporate political disclosure meaningful, by making it uniform and universal.
Bruce F. Freed is president of the Center for Political Accountability, a nonpartisan, nonprofit organization that is promoting corporate political disclosure and accountability. Karl J. Sandstrom, CPA's counsel, is a former vice chair of the Federal Election Commission.