SILENCING CORPORATE AMERICA BY USING ‘DISCLOSURE’
The Soros-funded ‘CPA-Zicklin Index’ is merely a weapon against business.
Jonathan Macey
Oct. 22, 2013
EXCERPT FROM THIS ARTICLE: The presumption that more disclosure by corporations is necessarily good for investors is also deeply flawed. U.S. companies must compete in a highly politicized world in which engagement in politics—and with politicians—is, unfortunately, necessary. In the context of antitrust, intellectual property, securities regulation, environmental law and many other fields, engagement in politics often is essential for survival. Boards of directors’ fiduciary duties to maximize shareholder value often require that companies engage with the politicians who control the competitive and regulatory environment in which they operate.
While the Center for Political Accountability purports to care only about disclosure, it is in fact part of a war in which activists try to silence pro-business points of view by using disclosure to name and shame the companies that speak up for U.S. business.
A key ally in this effort is the Coalition for Accountability in Political Spending (CAPS), which, like the Center for Political Accountability, is funded by Mr. Soros’s Open Society Institute. Founded by New York City Democratic mayoral candidate Bill de Blasio, CAPS aims “to direct corporate America to change its ways,” promising to “inflict economic damage on offending companies.” The clear goal of these activists isn’t disclosure but unilateral business disarmament.
Many American businesses are mulling the latest results of the annual “CPA-Zicklin Index,” which purports to use empirical methods to measure the accountability and transparency of spending by publicly held companies. The index is a joint project of the George Soros -backed Center for Political Accountability and the Zicklin Center for Business Ethics Research at the Wharton School of the University of Pennsylvania.
A word to company officers and shareholders: Ignore the index. It is another salvo by activists in the continuing political war against corporate America.
The index’s headline claim is that increased disclosure is “a competitive advantage.” Yet nearly 82% of shareholder votes among Fortune 250 companies refused to support activist shareholder proposals seeking increased disclosure of expenditures on what the activists dub “political spending,” which includes payments to tax-exempt, issue-advocacy groups, including trade associations.
The index may acquire an air of legitimacy from its association with a venerable business school, but its ranking system is deeply flawed. The design and metrics are outcome-oriented, reflecting the subjective and political biases of the index’s sponsors. It simply isn’t a valid indicator of whether a corporation is using shareholder funds properly.
The index is divided into three broad categories: disclosure, policy and oversight. In 2011, the disclosure component made up one third of a company’s overall score. This year more than half of each company’s score was determined by various disclosure factors. Changing the methodology from year to year, the index creates the illusion that companies have not established satisfactory disclosure practices. From 2011-12, there were significant changes to the relative weight assigned to disclosure of contributions to trade associations, 501(c)(4)s, candidates, political parties and 527 groups that don’t expressly advocate for the election or defeat of a candidate or party.
Companies that buy into the ostensible legitimacy of the index and try to change their practices to appease the activists often are dismayed to find that reforms made one year invite further demands the next year. For example, Merck was ranked first in the index in 2012 but received two separate shareholder proposals demanding additional disclosure in 2013. A high ranking on the index is no insulation from further demands.
The presumption that more disclosure by corporations is necessarily good for investors is also deeply flawed. U.S. companies must compete in a highly politicized world in which engagement in politics—and with politicians—is, unfortunately, necessary. In the context of antitrust, intellectual property, securities regulation, environmental law and many other fields, engagement in politics often is essential for survival. Boards of directors’ fiduciary duties to maximize shareholder value often require that companies engage with the politicians who control the competitive and regulatory environment in which they operate.
While the Center for Political Accountability purports to care only about disclosure, it is in fact part of a war in which activists try to silence pro-business points of view by using disclosure to name and shame the companies that speak up for U.S. business.
A key ally in this effort is the Coalition for Accountability in Political Spending (CAPS), which, like the Center for Political Accountability, is funded by Mr. Soros’s Open Society Institute. Founded by New York City Democratic mayoral candidate Bill de Blasio, CAPS aims “to direct corporate America to change its ways,” promising to “inflict economic damage on offending companies.” The clear goal of these activists isn’t disclosure but unilateral business disarmament.
Lobbying and political contributions by companies are necessary. James Madison’s observation in Federalist 10 that “enlightened statesmen will not always be at the helm” today seems highly optimistic: We live in a time when enlightened statesmen are seldom at the helm. Instead, many politicians often seem intent on stifling free enterprise with crippling regulation. Regulations like those in the 2010 Dodd-Frank financial reform law are tough enough to overcome. It was essential for businesses to get the word out regarding policies such as carbon cap-and-trade and union card-check legislation before they could do even more economic damage.
If shareholder activists brandishing the CPA-Zicklin Index stop capitalists in the U.S. from engaging in politics, only anti-capitalists will have a voice inside the Washington Beltway. The results would be catastrophic for American competitiveness.
Mr. Macey, a professor of corporate law, corporate finance and securities law at Yale Law School, is the author of “The Death of Corporate Reputation: How Integrity Has Been Destroyed on Wall Street” (FT Press, 2013).