Investing in influence: investors, holding companies and political donations

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Compelling academic articles

The Global Research Alliance for Sustainable Finance and Investment is a collaboration of universities committed to producing high-quality, interdisciplinary research and teaching programs in sustainable finance and investment. In this series, we highlight compelling papers presented at the last GRASFI conference, with commentary from a BNP Paribas Asset Management ‘practitioner’.

As the sustainable investor for a changing world, BNP Paribas Asset Management supports GRASFI’s efforts to bring academic rigor to the challenges of sustainable finance and investment. Through its sponsorship, BNPP AM is able to access cutting-edge academic research on sustainable finance and investing, helping to inform the wider debate. Our goal is to share these thoughts with customers and the industry. Visit the GRASFI conference website.


Billions of dollars are spent on elections in the United States, with a significant portion coming from “action committees” whose influence can extend to the votes of lawmakers and election results.[1] Yet the mechanisms by which money and influence, also from investors and corporations, travel through the American political system are understudied.

For BNPP AM, this highlights the need for transparency on corporate political donations. While these donations may serve a purpose, such as helping to influence outcomes, they also carry the risk of political corruption.

The 2020 US election was by far the most expensive ever, with the Center for Responsive Politics estimating that the presidential and congressional races together cost $14 billion.

In ‘Investing in influence: investors, holding companies and political donationsthe authors[2] discover and quantify how corporate ownership can be an important tool through which institutional investors and political action committees (PACs) amplify their influence.

They show that between 1980 and 2016, after an investor takes an equity stake in a company, the likelihood almost doubles that the company’s PAC will donate to the same politicians as its investor’s PAC. If the investor obtains a seat on the board of directors, this probability is multiplied by five.

The authors say that, on average, large block investments are associated with companies increasingwithout diminishing their political gifts.

After an investor takes a stake, they say that the alignment of the company’s political giving with that of the investor “is best explained as trading off a set of bad governance issues for a other. As such, our findings contribute directly to the active debate in law and economics about corporate governance and corporate political activity.

The battle for campaign finance

Corporations have sought to influence the political process ever 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 United States.

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 to the U.S. Constitution, the government could not limit corporate funding of independent political spending during elections.

The decision overturned century-old campaign finance regulations and allowed corporations, wealthy donors and special interest groups to spend unlimited funds on elections and wield outsized influence over elections at the risk of corruption. Politics.

Campaign finance laws aim to counter this influence by allowing the public to trace political influence efforts back to the source, and thus vote out politicians out of office if they are held by special interests.

Political Donations and Investor Interests

The authors sought to investigate a form of political influence using data on political donations and ownership of all 13-F investors between 1980 and 2016.

They compared data from 9,632 13-F investors (those with at least $100 million under management) with 61,415 portfolio companies, and found correlations in political finance when investors took more than 1% stake. .

The trend was particularly strong if the investor was a private equity fund or perceived as more partisan.

The authors seek to interpret their findings from the perspective of corporate governance and societal well-being. They say the best explanation for their data is that investors influence companies to give to politicians in a way that reflects investors’ interests. (The increased correlation of political donations when an investor sits on the board is one potential mechanism for doing this.)

Allocate funds from whom?

However, they refrain from making strong judgments because corporate political donations can be problematic. One of the central issues is the “agency problem”, the well-known problem that company management can use money that – in the case of CAP spending – ultimately belongs to employees to their narrow interests.

They say, “Once we’re in the world of second-best, it’s harder to make decisive statements about poor allocation from a business perspective.”

However, they say their findings for private equity funds – which have been shown to have greater influence over their portfolio companies – “go against the spirit of the finance laws.” campaigns”.

The authors comment: “Our stronger findings for private institutional investors suggest that investments may be another means by which already influential individuals can further amplify their political influence in ways that are difficult for the public to discern.”

BNPP AM: Greater transparency is needed

Commenting on the document, Adam Kanzer, Head of Stewardship, Americas at BNP Paribas Asset Management, said:

“Corporate political spending in the United States — directly from corporate treasuries and, in the case of this paper, by corporate PACs using employee money — poses underappreciated risks to investors and to our Presumably, these expenditures are intended to serve the best long-term interests of shareholders, but they are largely opaque.

Investors have worked to address this problem by strongly encouraging greater transparency and board oversight of all corporate political spending. This, however, does not answer the question of legitimacy – does corporate money really have a place in our electoral system? There has been no significant call from investors to spend less on the election 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 could use their clout with companies – especially when they get a seat on the board – to increase their political clout. This may be correlation without causation, or it may signal another underestimated 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, Mathilde Bombardini, Raymond Fisman, Francesco Trebi, Eyoub 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.

All opinions expressed herein are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may have different views and make different investment decisions for different clients. The opinions expressed in this podcast do not constitute investment advice.

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