Friday, December 25, 2015

Principal agent problems

This is Joseph.

I am not usually all that bright but this new law confuses me:
The second provision relates to a campaign by investors and Democrats to prod the SEC into forcing corporations to disclose their political spending. The idea gained steam from a 2011 petition by a group of corporate law experts arguing that the Citizens United decision made corporate disclosure especially urgent. The petition has attracted 1.2 million public comments, the most in the SEC's history. The budget bill prohibits the agency from spending any funds to "finalize, issue, or implement" any rule on disclosure of political contributions.
As the petition observed, shareholder interest in such disclosure was so strong that more than half the companies in the Standard & Poor's 100 index had voluntarily adopted the policy by 2011. But the pace of adoption had slowed considerably in recent years, suggesting that SEC action is needed.

Indeed, the Supreme Court in Citizens United placed great weight on the value of disclosure -- perhaps naively so. "With the advent of the Internet," Justice Anthony M. Kennedy wrote for the majority, "prompt disclosure of expenditures can provide shareholders and citizens with the information needed to hold corporations and elected officials accountable for their positions and supporters." Disclosure would enable shareholders to "determine whether their corporation’s political speech advances the corporation’s interest in making profits, and citizens can see whether elected officials are 'in the pocket’ of so-called moneyed interests."

But as the law professors noted, this system doesn't work unless shareholders "have information about the company’s political speech....Absent disclosure, shareholders are unable to hold directors and executives accountable when they spend corporate funds on politics in a way that departs from shareholder interests."
Now, stop me if you have heard this before but don't the shareholders actually own the company?  How does allowing the managers of a company (owned by other people) conceal information about the use of corporate resources help matters?  Companies are already dealing with a host of principal agent problems but these can only be compounded by allowing these things to do done in secret.  If the political goals of the company advance the interests of the shareholders then should this not be the sort of thing that corporate executives should be able to easily justify? 

I can understand that transparency can be hard and that some forms of corporate practice need to be kept secret.  But this is a direct category of spending company profits (e.g. potential shareholder value) on what could be distinct from the best interests of the shareholders. 

Why would we not want more transparency?

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