The following post comes to us from Sarah C. Haan, Associate Professor of Law at the University of Idaho College of Law.

With midterm elections six weeks away, the newest CPA-Zicklin Index has been published here. The 2014 Index is the fourth installment of the annual ranking of top publicly-held companies based on their voluntary political spending disclosure. The Index, a joint project of the Center for Political Accountability and the Zicklin Center for Business Ethics at the Wharton School, has this year expanded its scope from the top 200 to the top 300 companies on the S&P 500, and has bestowed its top ranking on CSX Corp. and Noble Energy, Inc.  Those companies’ scores – they tied for 97.1 on a scale of 100 – suggest that at least some large, publicly-held companies have achieved near-perfect transparency.  But transparency for whom – shareholders or voters?

The Index quietly changed its name this year. Last year, it was the “Index of Corporate Political Accountability and Disclosure.” This year, it is the “Index of Corporate Political Disclosure and Accountability,” leading with the word “Disclosure.” The change may seem subtle, but it hints at the Index’s ambivalence on a key question: does it promote investor-focused principles or public disclosure?  Contrary to the Supreme Court’s suggestion in Citizens United, a single disclosure regime cannot serve both groups effectively.

In a forthcoming article, titled “Voter Primacy,” I argue that the Supreme Court committed a serious error when it suggested in Citizens United that campaign finance disclosure should (or can) serve both an investor audience and a citizen audience.  In Part IV of Citizens United, eight of nine Justices agreed that “prompt” campaign finance disclosure “can provide shareholders and citizens with the information needed to hold corporations and elected officials accountable for their positions and supporters.”  This fails to recognize that both the manner and substance of effective disclosure for an investor audience is likely to be very different from effective disclosure aimed at a public audience.  One reason for this is that investors and voters use corporate political spending information for very different purposes.

Unfortunately, the CPA-Zicklin Index puts the Supreme Court’s error into action by promoting corporate disclosure that tries to serve both audiences simultaneously. The result is that the voluntary corporate disclosure promoted by the Index serves neither shareholders nor voters particularly well.

Under the CPA-Zicklin Index regime, voluntary disclosure generally comes in the form of semi-annual reports published to the websites of participating companies. These reports disclose some, but usually not all, of a company’s electoral expenditures, and most of what is disclosed is publicly available elsewhere, such as on the websites of state election regulators. These reports are mainly useful because they synthesize into a single document much of a company’s electoral spending across different state, federal, and even foreign jurisdictions. They can also be useful in the rare case where a company discloses its payments to politically-active 501(c) nonprofits.

In the next few paragraphs, I outline some principles for effective, shareholder-focused disclosure of corporate political spending that the CPA-Zicklin Index has not endorsed.  If companies are serious about voluntarily disclosing their political spending to investors, they should consider adopting some of these principles. In my view, investors would benefit from timely Internet disclosure of expenditures as they are made, as well as from comprehensive disclosure reports (like the kind they now produce) that are published sufficiently in advance of the company’s annual shareholder meeting to allow shareholders to use the “procedures of corporate democracy” to address the company’s political activity.  Critically, investor-focused disclosure would also connect corporate electoral spending to electoral outcomes. It would eschew the high disclosure thresholds in use at most Index companies for lower disclosure thresholds in the range of $10,000, and include disclosure of payments to tax-exempt policy development organizations, like ALEC, and to think tanks that seek to influence public policy. It would reward companies for actively distributing corporate political spending information via the company’s regular channels of investor distribution, rather than placing the information on a webpage that must be sought out. Finally, good disclosure from an investor’s point of view would emphasize accuracy because inaccurate political spending disclosure poses risks to the company.

Shareholders can do two basic things with a corporation’s political spending information, if the information concerns them. First, they can exit the corporation by selling their shares. Second, they can take action at the next annual shareholder meeting by making a shareholder proposal or by voting to unseat a director.

The medium for the voluntary disclosure of corporate political spending is the Internet; companies post disclosure reports on their own websites.  This makes it possible for companies to disclose expenditures in nearly real-time, and certainly more frequently than campaign finance disclosure laws require. FEC data suggest that the main way corporations spend money to influence elections, other than through “dark money” donations, is by donating to Super PACs. Federal disclosure laws mandate quarterly or monthly disclosure of Super PAC donations; Super PAC financial disclosures are generally current through the 20^th day before an election. After that, most corporate Super PAC donations go dark, with last-minute donations being revealed only after the election.  This means that current campaign finance disclosure rules do a poor job of notifying shareholders when the corporation has made a political expenditure, even a very large one. That is not surprising, since campaign finance disclosure laws were not designed to serve an investor audience.

Investors would benefit from quick disclosure of specific expenditures, to facilitate exit.  It is in a shareholder’s interest to exit quickly after an offending donation, both because this sends a political message to management and to the markets, and because it reduces the likelihood that the shareholder will suffer further damage to her expressive interests if the company goes on to make additional, similar political expenditures.

For purposes of participating in the “procedures of corporate democracy,” investors would benefit from comprehensive disclosure reports published far enough in advance of the annual shareholder meeting to facilitate shareholder action on the subject. The CPA-Zicklin Index encourages companies to produce only semi-annual reports – significantly less frequent disclosure than that required by the FEC – and many companies on the Index produce voluntary reports for two specific periods: January 1 through June 30, and July 1 through December 31. Many other companies produce only a single annual report. For example, investors will not know how much Yum Brands, Inc. spent on the 2014 midterm elections until 2015. These reporting cycles are not well-tailored to shareholders’ informational needs, either for exit or shareholder action. (They are not well-tailored to voters’ informational needs either; in a year with a November election, companies that publish semi-annual reports with a reporting period that closes on June 30 will engage in months of undisclosed spending leading up to the election, and virtually nothing is learned before the election about the political spending of companies that publish year-end reports.)

Rule 14a-8 requires a shareholder who wishes to submit a proposal at the annual shareholder meeting to do so approximately four months before the release date of the company’s proxy statement, which itself is typically released a little more than a month before the meeting. This means that a company with an annual shareholder meeting in May will need to publish its voluntary political spending disclosure before the end of the previous calendar year in order to give shareholders enough time to consider making a shareholder proposal. Yet in the last full-term federal election, many corporations did not post disclosures of their 2012 expenditures to their websites until June 2013 or later – after Proxy Season had come and gone. At a minimum, disclosure for shareholders should be completed and up-to-date around six months before the annual shareholder meeting, and the timing of the disclosure report should be pegged to the date of release of the company’s proxy statement.

Here is a fairly radical idea in the realm of corporate political spending disclosure, but a common-sense one from the perspective of shareholders: companies should report their electoral spending alongside electoral outcomes. In an election year, a company’s first disclosure report published after Election Day should connect the company’s electoral expenditures to outcomes in candidate elections and ballot initiative contests. Such a report should summarize the corporation’s spending over the previous two years, since election cycles are understood to run for two-year periods. From an investor perspective, connecting corporate spending to electoral outcomes is critical to understanding whether management is spending the company’s political money wisely.  This practice would also encourage companies to engage in access-oriented electoral strategies, which tend to involve small donations, made (where possible) directly to candidates, and often to multiple candidates for the same office.

Investor-focused disclosure should also total the company’s payments, so investors can easily understand the total amount of money a company has spent.  Chevron’s voluntary disclosures, which run for pages, simply list dozens of payments to various recipients; apparently it expects its investors to read the disclosure report with a calculator at hand.

Rather than adopt federal disclosure thresholds – or the lower thresholds in use in state elections – the Index lets companies choose their own disclosure thresholds. This has predictably led companies to choose very high thresholds. For example, UPS, Inc., was lauded by this year’s Index for its top-five ranking. But UPS, Inc. discloses only non-tax-deductible portions of payments to trade associations to which the company makes payments of $50,000 or more in a six-month period. That threshold is much higher than disclosure thresholds found in campaign finance laws and is absurdly high for state and local elections. In many jurisdictions, public companies will have shareholders who are also eligible to vote; such shareholders are likely to care about much smaller amounts of corporate political spending.

Companies should also disclose to their investors payments to tax-exempt policy development organizations, like ALEC, and to think tanks that seek to influence public policy.  In 2013, Yum! Brands Inc. began disclosing its payments to tax-exempt policy development organizations.  The Index should add disclosure of payments to these types of politically-active (and influential) organizations to its metrics.

Public companies should distribute political spending information via their regular channels of distribution of company information.  A number of large, publicly-held companies use press releases, RSS feeds, and/or social media platforms to distribute company information to investors and analysts. But companies on the Index are not using these tools to distribute information about their political spending.  In fact, there is evidence that some companies take steps to hide political spending disclosures.  A 2011 analysis criticized Altria’s website political spending disclosures for making it “impossible to get to the bottom line without a great deal of effort.” In a 2013 lawsuit, a shareholder of Aetna, Inc. alleged that the company had “secreted” its political spending disclosures “under a tab entitled ‘Health Care Initiatives.’”  The Index does not presently give extra credit to companies that “push” political spending disclosures to investors, but it should.

Accuracy of disclosure is a critical shareholder issue. The Index should have a metric that assesses accuracy, even if only of a sampling of data, and a mechanism for holding companies accountable for false or misleading disclosures, but it does not.  The Index itself acknowledges accuracy as a serious limitation. This need was made clear in 2012, when Aetna revealed – accidentally – in a filing to the National Association of Insurance Commissioners (NAIC) that in 2011 it had made $3.3 million in previously undisclosed payments to a politically active 501(c)(4) nonprofit, the American Action Network.  That year, Aetna had declined to disclose (c)(4) payments in its voluntary corporate disclosure; it later revised the NAIC filing to remove the payment.  Aetna’s CEO took the position that disclosure of the money was not required because it was spent on “educational activities.”  Aetna has always been a high-scoring company on the CPA-Zicklin Index; this year, only 71 companies out of 300 scored higher (including companies that spent nothing on politics).  Its arguably misleading disclosures led a shareholder to file a securities fraud lawsuit against the company in 2013, and the complaint in the case details discrepancies between the voluntary disclosure reports that Aetna published on its website and information provided to the IRS by nonprofits that claimed to have received payments from Aetna.  Thus, accuracy of voluntary disclosure is an issue of risk and potential liability.

As these suggestions show, truly investor-focused disclosure would be different in both form and substance from the disclosure promoted by the CPA-Zicklin Index.  In the coming years, the Index will need to decide whether it primarily serves an investor audience, and thus should emphasize management “accountability” to shareholders and cost-effective political spending, or if instead its true purpose is to shed light on corporate political spending for voters. A voluntary regime can probably do the former, but whether it can do the latter remains to be seen.