What Companies Don't Want You to Know About the Millions They Spend

It's long been said that lobbying is the second oldest profession in the world. Certainly, corporate influence over the political process is nothing new. That said, corporate political spending and lobbying may never have featured as prominently in the minds of shareholders and the general public as it does right now. Valero Energy (NYSE: VLO), Lorillard (NYSE: LO), and Dean Foods (NYSE: DF) learned that the hard way this proxy season when a majority of shareholders voted to force the companies to report publicly on their political activities.

The Lobby of the House of Commons, 1886 by Liborio Prosperi. 

Why should I care?
It's pretty clear why members of the general public should care about companies' ability to steer our political process. If a major company wields the kind of influence that could alter the course of significant legislation, you as a voter and citizen might want to know. Right now, for instance, corporate lobbyists on both sides of the issue are spending large amounts of money -- roughly $173 million in a single year, and likely climbing in 2014 -- on efforts to manipulate various environmental laws and regulations. Whatever your thoughts may be on the optimal outcome, you can be sure that it will affect your life in profound ways.

If you are an investor, though, there is a specific reason why companies' political activities should matter to you: They can tell you a lot about corporate risk appetite. Such were the findings of "Corporate Lobbying, Political Connections, and the 2008 Troubled Asset Relief Program," a 2011 working paper published by the Social Science Research Network. Referring to the controversial 2008 Troubled Asset Relief Program, which many viewed as a corporate bailout, the authors note:

Firms that lobbied had a 42 percent higher chance of receiving TARP support than firms that did not lobby. Similarly, politically connected firms had a 29 percent higher chance of receiving support than non-connected firms.

One possible interpretation of these findings is that corporations that engage more heavily in lobbying and political spending are more likely to be taking existential risks that threaten their survival, thus needing government support. Now, you might say that these companies brilliantly captured funds for themselves, in which case I would ask you two rhetorical questions:

1. How do you feel about that as a taxpayer?
2. What happens if a TARP-like bailout doesn't materialize in the next downturn?

Where the magic happens. Source: Architect of the Capitol.

Shareholders demand transparency
If those questions trouble you, you're not alone. This year, shareholder activists filed 133 resolutions related to corporate political activity, up from 128 in 2013. Importantly, these resolutions have been garnering significant shareholder support this proxy season.

What's proxy season, you say? If you're a shareholder, you have the right to vote on certain corporate matters. Since most people cannot attend companies' annual meetings, corporations offer shareholders the option to cast a proxy vote.

Most proxy votes originate with company management and a few dozen large financial institutions, which typically vote automatically with management and hold the majority of a company's shares. It is therefore difficult and extremely rare to see a majority vote on a shareholder-initiated proposal. Still, even relatively modest shareholder votes can drive significant corporate policy changes.

This proxy season's votes on corporate political activity should put corporations on notice. Of the 87 that have gone to vote so far, following are the ones that received more than 40% support from shareholders.

Source: Sustainable Investments Institute.

You can't handle the truth
To be clear, that's a lot of shareholders voting against management. Most companies still don't support increased transparency on their political spending. For some reason, they don't want shareholders to know what they're trying to persuade politicians to do. I don't know about you, but that makes me wonder what else they're trying to keep from me.

To get a sense of individual companies' disclosure of their political activities, consult the CPA-Zicklin Index, published by the Center for Political Accountability.

Despite the many foot-draggers, corporate support for greater transparency is growing. Twenty-nine percent of S&P 500 companies embrace enhanced disclosure of political spending, according to the Sustainable Investments Institute, up from 20% in 2011. And clearly, shareholders are clamoring for more information. My bet is that it's only a matter of time before companies have to open the books, and it probably won't all be pretty.