When investigating political scandals, journalists are always advised to follow the money. Should investors do the same? If we had been better informed about the political donations made by corporations, would we have been better able to avoid train wrecks like Enron and WorldCom?
Yes, according to a new study by the Center for Political Accountability. "Contributions are like smoke," it concludes. "They can indicate to shareholders the need to look further to see whether there is fire."
Companies don't have to disclose to investors the soft money gifts they make to parties and political groups. That is plainly a major loophole. But I'm not convinced it matters in the way the authors of the study say it might. The study reflects a Washington-centric view of how corporations work and shareholders think.
In constructing case studies of soft money donations by Enron, Global Crossing, WorldCom, Qwest, and Westar Energy, the study concludes that "for four of the companies, contributions helped them avoid oversight, pull regulatory end runs, engage in questionable activities and reinforce a go-go image." A fifth tried to use contributions, "unsuccessfully it turned out, to arrange a legislative fix that the company needed to manage its heavy debt." In the end, though, what matters is not what the contributions achieved (or did not achieve) but what they symbolized. "In each of the cases, contributions were part of a pattern of risky and sometimes illegal behavior that ultimately sank the companies and cost shareholders hundreds of billions of dollars."
That's true. The authors also believe that if the wayward companies had been forced to disclose their political giving, it would have alerted shareholders that something might be terribly wrong. But undisclosed soft money donations were irrelevant to the wrongdoing at Enron, WorldCom, and these other miserables. These companies blew up because their CEOs were boneheaded, corrupt, or crooked, and because the highly paid private-sector professionals who were supposed to alert us to such boneheadedness, corruption, and crookedness failed to do their jobs.
The study suggests that if we knew more about Enron's $2.287 million in soft money donations in the three election cycles prior to the company's implosion, it should have "prompted financial analysts and others to look more closely and skeptically at the company's operations and management's claims." But when it came to the corruption that Enron engendered, $2.287 million was a rounding error. It pales in comparison to the hundreds of millions of dollars Enron paid investment banks, lawyers, consultants, even employees to, in effect, look the other way. Had Enron made no political donations, it still would have metastasized into an enormous fraud as everybody—regulators, credit rating agencies, journalists—slumbered. (And it was not exactly a secret that Enron was sucking up to GOP politicians. Its CEO was "Kenny-Boy" Lay, after all.)
Between 1998 and 2002, WorldCom gave $2.5 million in soft money to organizations on both sides of the aisle. "The company's political contributions played a role in this high-growth posturing, belying the mountains of debt behind the large donations." Again, that $2.5 million was dwarfed by the sums that WorldCom lent to CEO Bernie Ebbers. This data, which was disclosed to investors long before WorldCom imploded, should have been a red flag.
More disclosure is always desirable. But it wouldn't have prompted the necessary questions that could have exposed management's soft underbelly. Would CNBC anchor Mark Haines, armed with the knowledge of WorldCom's political contributions, suddenly have stopped tossing softballs when Ebbers came on his show? Would investment banks have leaned on analysts to go negative had they know the GOP was pocketing Enron cash? Doubtful.
There's some good stuff in the CPA report, to be sure. The study shows how cash from Coors, PepsiCo, and Union Pacific given to Restore America PAC wound up in the coffers of Kansans for Life. And some companies simply aren't coming clean. Eight of the 22 companies that denied in a questionnaire making soft money donations appear to have made them in the 2004 election cycle.
Washington good-government types see political donations as a form of corruption and may be inclined to draw a negative conclusion about a company or person based on donations. But Wall Street tends to view donations simply as a competitive advantage. Dozens of publicly traded companies and entire industries either rely on the government directly for big chunks of business or stand to benefit directly from policy decisions—health care, pharmaceuticals, tobacco, telecommunications, cable, steel, energy. As a result, shareholders would deem management of such companies negligent if they weren't trying to influence policy through whatever legal means existed, including donations.
The Center for Political Accountability devised a CPA Rating for 120 companies. Of them, 118 companies receive an F for transparency because they did not disclose their political donations. "Only one, Morgan Stanley, received high marks for both transparency and accountability." A second, Pfizer, "received a passing grade for transparency because it disclosed its soft money contributions on its website." That doesn't make them good investments or even paragons of good governance. Pfizer is under fire for its handling of Celebrex. And Morgan Stanley's Philip Purcell is quietly emerging as a poster child for the overfed, underperforming, tin-eared CEO.
There are 50 ways to leave your lover, and 5,000 ways to destroy shareholder value. Surreptitiously making legal political donations ranks pretty low on the list.