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Soon There Will Be Red Mutual Funds And Blue Mutual Funds

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One problem that a lot of people have noticed is that Americans do not spend enough time talking about politics. Yes, you can devote several hours a day to watching political news and forwarding political emails and signing secession petitions, but certain areas of life are not utterly infused with political rancor. Buying stocks is ... somewhere on the spectrum, less politicized than buying beer but more politicized than buying toothpaste.

Lucian Bebchuk wants to change that. He has a post on DealBook, based on this paper he wrote with Rob Jackson, urging the SEC to make companies disclose their political contributions, so that you can get all mad and sell your stock in companies that make contributions to your less preferred candidate and buy stock in companies that make contributions to your more preferred candidate. I mean, I can just tell you: buy oil stocks if you’re a Republican and tech stocks if you’re a Democrat and the financial industry is kind of a mixed bag but, lately, Republican.

You could ask yourself a question like “why should a company do what its shareholders want?” and then you could answer “because the shareholders own the company,” but that is not an entirely compelling answer. They don’t really; they are residual claimants on the company’s income, or whatever; nobody owns the company, the company is people my friend; the company is a bundle of sticks, and there you are with your stick, waving it around while you beg the question. The company perhaps - perhaps! - owes shareholders an honest day's effort to maximize the value of that residual income; it does not owe them doing the things that they want it to do.

But also, how do you know what the shareholders want? Or, what is a shareholder? I like thinking of most efforts at shareholder empowerment as kind of “let’s get rid of the agency costs of letting corporate executives use investor money for their personal silly goals and let investment managers use investor money for their personal silly goals.” If you vote Green Party and you own shares in a mutual fund run by a Republican and it owns shares in a corporation run by a Democrat, where do the company’s campaign contributions go? Probably not the Green Party. Like, here, I liked the Google Docs drawamajig so much I used it again:

That’s all there is!1 Bebchuk and Jackson in their paper cite all these institutional investors who support political disclosure; it’s a lot of the names you’d expect - CalPERS, etc. - and you could ask yourself, if CalPERS thinks “The board should disclose on an annual basis the amounts and recipients of monetary and non-monetary contributions made by the company during the prior fiscal year” for companies it invests in, is that relevant to CalPERS’s members, or to its management? If the members, why is there no aggregated political-contribution data in CalPERS’s investment reports? (Shouldn't the beneficiaries know how many of their dollars are going to each candidate?) If the management, what are they doing with it?

The answer to what are they doing with it is presumably that they are monitoring it for management self-aggrandizement. If the CEO is spending millions of dollars of corporate money on political contributions, someone might want to check to see if that’s (1) because it will help the company or (2) because it will help him with his future political career and/or his present desire to spend more time hobnobbing with politicians or whatever. And, to be fair, the answer is probably (2). Here you can read about how most companies that contribute to political campaigns do worse than most companies that don’t, on a whole variety of metrics, with the story being something like “CEOs who are spending their shareholders’ money on politics are probably wasting it, and probably wasting their shareholder’s money elsewhere too.”2

On the other hand, one study - which otherwise agreed - “found that corporate political giving is positively associated with market performance for firms in highly regulated industries,” so there’s that. Let’s just pick one such industry at random. Ben Walsh has a neat post today responding to everyone gloating over how Wall Street made a bad bet on Romney, pointing out that the expected value of a few tens of millions of dollars of contributions to deregulatory candidates was arguably3 massively positive, though the realized value does seem to be negative. If you were a portfolio manager at CalPERS, or for that matter at Vanguard, might you have views on financial industry regulation that were not solely determined by that regulation’s expected effect on the price of your shares of financial industry stocks? The glories of diversification might allow you to take a hit to your share price in order to get your preferred political outcome.

So, I dunno, I am a little skeptical that it makes much more sense to give shareholders say over this particular business decision than it does to give them a say over lots of other business decisions. That’s not really a reason to oppose Bebchuk’s proposal, though, since it’s just about disclosure: shareholders don’t automatically get a vote on contributions, the contributions are just disclosed every year, and if the shareholders don’t like them they can yell and sponsor resolutions and proxy fights and all that good stuff. If you’re disclosing conflict diamonds you might as well disclose political contributions. Disclose everything! What’s the worst that can happen? It’s not like people will stop paying attention to the business risks in your reports just because you’ve added a page on political contributions, right?

Letting Shareholders Know How Their Money Is Spent4 [DealBook]
Wall Street’s rational Romney bet [Reuters / Ben Walsh]

1.The alternate path where you invest directly in the company (but are not in management) and therefore have only the direct set of agency costs:

  • is rare, dollars-wise;
  • typically means you are in it purely for the money and not so into the politics of your company;
  • sometimes means you are in it purely for the politics - LOOKIN' AT YOU, NUNS - in which case, I mean, why are you doing your politics by buying shares?

2.Important grain of salt: as Bebchuk & Jackson point out, (1) others disagree, and (2) nobody really knows because corporate political spending is not consistently disclosed:

It will not be possible for researchers, and more importantly investors, to determine whether corporate spending on politics is beneficial for investors until there is adequate disclosure of such spending. At present, because much corporate political spending occurs under the radar screen, it is not possible for researchers or investors to evaluate the extent to which such spending is consistent with investor interests.

Fair! Also, proliferating agency costs alert: do you think Bebchuk and Jackson are just all “I want to do that research, so, SEC, get me the data”?

3.The argument is particularly strong if you have a one-factor model of financial-firm returns that is like “regulation: more bad, less good.” I do not, but it would not surprise me to hear that many financial industry employees do.

4.Oh that title! Let’s say Corporation X spends $10,000 in a year on political giving and $20,000 on pens. If “letting shareholders know how their money is spent” requires a line-item for the politics, does it require a line-item for the pens?


After The STOCK Act It Will Still Be Legal To Trade On Congressional Inside Information*

Here's a sort of touching monologue from David Einhorn's call with Punch: If you’ve done the analysis, and come to the conclusion that on it’s own, the company is not going to make it, it makes all of the sense in the world to raise equity at whatever the price is, so that you can know that the company, you know, is – is going to make it. Now, what that brings to my mind though is, you know, obviously we haven’t done your analysis, we haven’t done -- signed an NDA; I don’t know that we’re going to sign an NDA, because we prefer to just remain investors, but from my perspective, and I’ll be just straight up with you, is that gives a lot of signalling value. And the signalling value that comes from figuring out the company has figured out that it’s not going to make it on it’s own is that we’ve just grossly misassessed the -- you know what’s going on here. And -- and that, that will cause us to have to just reconsider what we’re doing, which is not the end of the world to you. You will continue on even if we don’t continue on with you. You could sort of see why the FSA read that to mean that he was insider trading. Like ... (1) You have told me something with signalling value. Sorry - "a lot of signalling value." (2) I will now act on that signal. (3) Don't be mad. "Signalling value" sure sounds like it means "material nonpublic information," doesn't it? Now as we've discussed before, trading on that information would not be enough to make Einhorn guilty of insider trading in the US, though maybe it wouldn't be exactly a great idea here either. Why? Because in our weird but sort of sensible insider trading laws, it's just not illegal to trade on material nonpublic information. It's only illegal to trade based on material nonpublic information that was obtained in violation of some sort of duty of confidence. Since Einhorn didn't sign an NDA, he had no duty of confidence. And since the Punch CEO and bankers weren't tipping him for nefarious purposes, but were instead sounding him out on the company's behalf as a shareholder and potential investor in a new capital raise, they weren't breaching their duty of confidence. You could quibble with the details of that but it's basically the law here. In England not so much. That also seems to be the law for our friends in Congress, who recently passed a law making it illegal for them to insider trade, which is worrying some people who make their living from trading on Congressional inside information: