The Global Research Alliance for Sustainable Finance and Investment is a collaboration of universities committed to producing high-quality interdisciplinary research and teaching curricula on sustainable finance and investment. In this series, we highlight compelling papers presented at the latest GRASFI conference, with a comment from a ‘practitioner’ at BNP Paribas Asset Management.
As the sustainable investor for a changing world, BNP Paribas Asset Management sponsors GRASFI’s efforts to bring academic rigour to the challenges of sustainable finance and investment. Through its sponsorship, BNPP AM is able to access leading academic research into sustainable finance and investment, helping to inform the broader debate. Our goal is to share these reflections with clients and the industry. Visit the GRASFI Conference website.
Billions of dollars are spent on elections in the US, with a significant share coming from ‘action committees’ whose influence can extend to legislator voting and election outcomes.[1] Yet, the mechanisms by which money and influence, also from investors and companies, travels in the US political system are under-researched.
In the view of BNPP AM, this underscores the need for transparency on political donations by companies. While such giving may serve a purpose, such as helping to influence outcomes, it also involves a risk of political corruption.
The 2020 US elections were the most expensive ever by a large margin, with the Center for Responsive Politics estimating the presidential and congressional races together cost USD 14 billion.
In ‘Investing in influence: Investors, portfolio firms, and political giving’, the authors[2] uncover and quantify how corporate ownership may be an important tool by which institutional investors and political action committees (PACs) amplify their influence.
They show that between 1980 and 2016, after an investor acquires a stake in a company, the probability nearly doubles that the company’s PAC donates to the same politicians as its investor’s PAC. If the investor obtains a board seat, that probability increases five-fold.
The authors say that on average, large block investments are associated with companies increasing, not decreasing, their political donations.
After an investor takes a stake, they say the alignment of the company’s political giving with that of the investor “is most readily explained by the trading of one set of mis-governance issues for another. As such, our results contribute directly to the active debate in law and economics on corporate governance and firm political activity.”
The battle for campaign finance
Business has sought to influence the political process since the expansion of the vote in the 1820s and 1830s reduced the electoral power of the landowning elite, changing the character of democracy in the US.
The current era began in 2010, when in a landmark case, the Supreme Court ruled[3] that under the free speech clause of the First Amendment of the US Constitution, the government could not limit corporate funding of independent political expenditures in elections.
The decision reversed century-old campaign finance regulations and allowed corporations, wealthy donors and special interest groups to spend unlimited funds on elections and exert an outsized influence in elections at a risk of political corruption.
Campaign finance laws aim to counter this influence by allowing the public to trace efforts at political influence to source, and hence vote politicians out of office if held to be captured by special interests.
Political giving and investor interests
The authors sought to investigate a form of political influence using data on the political giving and ownership of all 13-F investors between 1980 and 2016.
They matched data on 9 632 13-F investors (those with at least USD 100 million under management) with 61 415 portfolio companies, and found correlations in political funding when investors took a stake exceeding 1%.
The pattern was particularly strong if the investor was a privately held investment fund or seen as more partisan.
The authors seek to interpret their findings from the viewpoint of corporate governance and the welfare of society. They say that the best explanation for their data is that investors influence companies to give to politicians in ways that reflect investor interests. (The increased correlation in political giving when an investor takes a board seat is one potential mechanism for making this happen.)
Allocating whose funds?
However, they stop short of making strong judgments because firms’ political donations can be problematic. One of the central issues is the ‘agency problem’, the well-known issue that company management can use money that – in the case of PAC spending – ultimately belongs to employees for their narrow interests.
They say: “Once we are in the world of the second-best, it is more difficult to make decisive statements about misallocation from the firm’s perspective.”
However, they believe that their findings for private investment funds — which were shown to have a stronger influence on their portfolio companies — “run counter to the spirit of campaign finance laws.”
The authors comment: “Our stronger findings for private institutional investors suggest that investments may be another means by which already influential individuals may further amplify their political clout in a way that is difficult for the public to discern.”
BNPP AM: Greater transparency is needed
Commenting on the paper, Adam Kanzer, Head of Stewardship, Americas at BNP Paribas Asset Management, said:
“Corporate political spending in the US – directly from the corporate treasury and, in the case of this paper, by corporate PACs using employee money – presents underappreciated risks to investors and to our markets. Presumably, this spending is intended to serve shareholders’ long-term best interests, but it is largely opaque.
Investors have worked to fix this problem by strongly encouraging greater transparency and board oversight of all corporate political spending. This, however, does not address the legitimacy question – does corporate money belong in our electoral system at all? There has not been a significant call from investors to spend less on elections and many large investors are unconvinced that greater transparency is warranted.
For many investors, corporate political spending is a blind spot, both literally and philosophically. Interestingly, this paper suggests that private equity investors may be using their leverage with companies – particularly when they obtain a board seat – to increase their political leverage. This may be correlation without causation, or it may signal yet another underappreciated risk of corporate political spending. Further study may be warranted.”
References
[1] Source: ‘Are PACs Trying to Influence Politicians or Voters?’; https://onlinelibrary.wiley.com/doi/abs/10.1111/1468-0343.00036
[2] Marianne Bertrand, Matilde Bombardini, Raymond Fisman, Francesco Trebbi, Eyub Yegen
[3] In the case of Citizens United v. Federal Election Commission
Disclaimer
Please note that articles may contain technical language. For this reason, they may not be suitable for readers without professional investment experience.
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