Trust, Transparency, and Corporate Political Activity

By Michael R. Siebecker, Professor of Law, University of Florida Levin College of Law

Recently, a group of law professors petitioned the Securities & Exchange Commission (SEC) to adopt rules requiring corporations to disclose expenditures for political activities. The petition advances a variety of convincing yet fairly conservative arguments supporting both the need to adopt new political disclosure rules and the mechanisms for disseminating sufficient information. Although the petition adopts a properly dispassionate tone and focuses on pragmatic steps the SEC could easily take, the potential implications of a failure to adopt a political expenditure disclosure rule, or of a defeat of any new disclosure rule based on a First Amendment challenge, are much more striking than the petition conveys.

First, the failure to require public corporations to disclose their political expenditures would exacerbate a tragedy of transparency that already threatens the collapse of the market for corporate social responsibility (CSR), where consumers and investors employ various political, social, environmental, or ethical screening criteria before purchasing a company’s stock or products. On a worldwide basis, owners or managers of assets exceeding $14 trillion make investment decisions based on one or more CSR criteria. 

In an efficient market, fully informed consumers and investors could reward companies that engage in desired CSR practices by purchasing their products or stock, and, conversely, could punish companies that fail to engage in desired practices by refusing to purchase their products or stock. To the extent consumer and investor preferences for CSR provide compliant companies greater economic benefits (e.g., through higher consumer prices, stock premiums, or cheaper access to capital) than the cost of embracing CSR practices, an opportunity for true wealth creation exists that satisfies the preferences of consumers, investors, and corporate shareholders alike. That classic win-win opportunity quickly devolves into economic waste, however, if investors and consumers stop rewarding companies for engaging in socially responsible behavior. 

Unfortunately, corporations increasingly engage in a sort of “strategic ambiguity” in their public communications -- an ambiguity made possible by a variety of static yet inconsistent standards regarding the collection, auditing, and dissemination of information regarding CSR practices, including political activities. As a result, consumers and investors simply cannot trust the existing disclosure regime to provide reliable information necessary to monitor CSR compliance. That lack of trust will eventually cause the $14 trillion market for CSR to collapse, as continually frustrated consumers and duped investors stop offering rewards for responsible business behavior. The existing legal and regulatory framework requires correction to avoid the demise in the market for CSR and a new rule requiring disclosure of political activity represents an essential step in the right direction. 

Second, using the First Amendment to avoid complying with any new political disclosure rules puts at risk the viability of the entire securities regulation regime and the integrity of the capital markets. Following the Supreme Court’s decision in Citizens United, corporations enjoy essentially the same political speech rights as human beings. As a result, an impending jurisprudential train wreck exists between the Supreme Court’s approach to corporate political speech and its disparate treatment of commercial speech. As corporations begin mixing commercial messages with political commentary, First Amendment jurisprudence simply provides insufficient guidance on the role government should play in regulating that speech. Although Citizens United counsels against governmental restrictions on corporate political speech without regard to the truth or falsity of the message, a different branch of that same speech jurisprudence suggests governmental regulation of commercial speech remains essential to ensure consumers receive accurate information and to maintain market efficiency. Unfortunately, the Supreme Court has never articulated sufficiently clear definitions of “commercial” or “political” speech, or the boundaries between them, to address claims of politically tinged corporate speech. Because the securities laws essentially operate through content-based regulation of compelled speech, which often touches inherently political matters, the securities laws seem especially vulnerable to constitutional attack. Indeed, the Business Roundtable and U.S. Chamber of Commerce recently challenged on First Amendment grounds the SEC’s new proxy access rules, which gave shareholders the right to nominate dissident directors using the corporation’s own proxy. The Court of Appeals for the D.C. Circuit recently struck down the new rule on other grounds and failed to address the First Amendment claims. 

If corporations can use Citizens United to escape the ambit of a new disclosure rule on political activities, some of the most basic protections afforded under the securities laws would become ineffective. For instance, the securities laws prohibit corporations from “conditioning the market” in advance of an initial public offering by restricting severely corporate communications on matters unrelated to information upon which investors should make informed decisions. Consider an aggressive marketing campaign slightly in advance of an initial public stock offering for a hypothetical corporation, Acme Inc. Acme might like to announce its initial securities offering using a series of full-page print ads titled “How Acme Promotes Freedom Around the Globe.” In addition to reciting all the information permitted under the SEC rules, the ads would detail Acme’s political commitment to expanding freedom in new countries and admonish other companies to join Acme in economic development by ensuring safe labor standards for previously oppressed workers. Although those ads undoubtedly run afoul of the content limitations imposed under the SEC rules, Acme could ignore those proscriptions as long as the ads announcing the stock offering were inextricably linked to political speech. By using the First Amendment as a shield and cloaking efforts to drum up investor interest under the guise of political speech, Acme could avoid with impunity the strict limitations on illegal market conditioning established under the securities laws.

In addition to undermining basic investor protections regarding the issuance of securities, affording corporations full First Amendment protection for politically tinged commercial speech would shatter confidence in the system of mandatory disclosure and reporting for public companies. The mandatory disclosure and reporting requirements contained in the securities law involve both qualitative and quantitative disclosures. Clearly, the qualitative disclosures remain most susceptible to manipulation, with descriptive evaluations of company trends and risks easily couched in language evoking some political concerns.  But even when the securities laws compel disclosure of seemingly unadorned facts about business practices or operations, those factual disclosures may also be strategically embedded in an amalgam of political and commercial speech. Just recall Nike’s claim (litigated years ago in the U.S. Supreme Court before being settled) that its seemingly false factual disclosures about the company’s overseas labor practices constituted protected political speech immune from liability under a California consumer fraud statute, because the statements were part of an ongoing public debate about labor practices generally.  

Most certainly, the securities laws afford some defenses to liability for false statements or omissions if corporations exercise reasonable care or due diligence prior to making the misleading disclosures.  Nonetheless, to avoid the potentially high costs of investigation, verification, and oversight necessary to secure the due diligence and reasonable care defenses, corporations might opt for the much less expensive option of combining the most precarious corporate disclosures with some minimal political commentary.  If corporate political speech rights trump the antifraud provisions of the securities laws, companies will face a strong incentive to engage in an artful alchemy of mixing any potentially fraudulent disclosures with just enough political content to evade liability. The facility with companies could engage in that artful alchemy should cause great alarm, for the laws designed to protect the integrity of the capital markets would become wholly impotent.

Thus, the law professors’ petition to the SEC to adopt a new disclosure rules for political expenditures remains convincing not only for the sober reasons they articulate, but because the viability of the $14 trillion market for CSR hangs in the balance. Moreover, in light of Citizens United, the Supreme Court needs a new jurisprudential approach to insulate any new political activity disclosure rules -- and securities regulation regime generally -- from First Amendment attack. For more on an institutionally sensitive solution to the impending jurisprudential train wreck, I hope you’ll consult my other work.