Luigi Zingales on the possibility of a mandatory disclosure rule
You would think that 600,000 comments on a petition would be sufficient to bring an issue to the top of the US Securities and Exchange Commission’s agenda. But public opinion does not seem to matter if the issue is mandatory disclosure of political spending by corporations.
Denying rumors that such a rule will be promulgated soon, SEC Chair Mary Jo White recently told lawmakers that this issue is not at the top of her list of priorities. But it is at the forefront of the Republican Party’s concerns, reflecting its leaders’ determination to prevent any such requirement from taking effect. In April, Ann Wagner, a Republican congresswoman, introduced a bill “to prohibit the Securities and Exchange Commission from issuing rules requiring the disclosure of an issuer’s expenditures for political activities.”
The reason why such an apparently minor issue is gaining so much attention is that it transcends corporate governance and goes to the very essence of America’s democratic system. For this reason, it is important to understand what is at stake.
Freedom of expression is a core democratic principle. Integral to this freedom is the right to spend money to disseminate speech. Any limitation on spending is a limitation on freedom of speech itself.
But is this right limited to individuals or does it extend also to associations of individuals? In a controversial decision issued in 2010 – Citizens United vs. Federal Election Commission – the US Supreme Court ruled that the First Amendment of the US Constitution also protects the free-speech rights of associations of individuals. Thus, corporations, as associations of individuals, have the right to spend as much as they want to disseminate their views, including in support of electoral campaigns.
Whether you like the political consequences of the Citizens United decision or not, it has its own logic. And that logic applies outside of the United States as well, and can lead to similar consequences everywhere: an enormous increase in the largest corporations’ political power. Will parliamentarians become mere spokesmen of corporate interests? Is there any mechanism within the US Constitution, or other constitutions, to prevent this?
A logical implication of the view that corporations are “people” is that shareholders should learn about the political spending carried out by the companies in which they invest.
Disclosure may help democratize political donations, preventing them from having an undue influence in elections. If I appoint an agent to manage my money, shouldn’t I want to know how much he spends on political donations in my (alleged) interest? And wouldn’t it be preposterous for any rule or regulation to prevent me from finding out?
But this is exactly what is happening. Not only do companies refuse to disclose to their shareholders how much they spend on political campaigns; they also are lobbying hard to prevent any rule that would require them to do so. The US Chamber of Commerce opposes all such proposed rules as “politically motivated,” because the pressure to require disclosure of election-related corporate spending does not come from institutional investors, but from government pension funds controlled by elected officials.
But conservative groups are shortsighted in their opposition to mandatory disclosure of such information. They believe that it would weaken Republicans and benefit Democrats, and they are right: there is no doubt that the left stands to gain more in the short term from such a requirement. But the biggest winner would be democracy. The current political game in the US is one in which both Republicans and Democrats compete for corporate money, which they then deploy in expensive campaigns to preserve or increase their power.
The winners are not the Republicans or the Democrats, or even the companies that fund them. The winner is a corrupt form of capitalism that is undermining the US economy, making it less productive and undermining people’s sense of fairness.
I doubt that a mandatory disclosure rule alone could fix the problem. But it would be an important step in the right direction. More important, actively blocking that step forces the political system toward a precipice from which democracy cannot return.
Luigi Zingales is Professor of Entrepreneurship and Finance at the University of Chicago Booth School of Business and the author of A Capitalism for the People: Recapturing the Lost Genius of American Prosperity.
(c) Project Syndicate, 2013