Should IFRS shine a light onto dark money?
The question comes to mind after reading a recent New York Times article titled: Why Dark Money is Bad Business. Here are some extracts:
- “It’s only May, but this presidential election is on track to be one of the most expensive ever. So far two-thirds of election dollars have largely come from anonymous corporate donations, funneled through what have been referred to as “dark money” nonprofit groups that freely engage in electoral and legislative politics, but don’t have to disclose their donors, expenditures or even their members.
- One of the most promising strategies to stem the tide of corporate dark money is a proposed rule at the Securities and Exchange Commission that would require public companies to report the amounts and recipients of their political spending. The rule has received a groundswell of support from a bipartisan group of former S.E.C. commissioners, state treasurers and law professors, and has generated more than one million public comments.
- Defenders of the status quo argue the companies are simply exercising their right to free speech; critics contend that such speech, when anonymous, does immense harm to the democratic process.
- But as lawyers who specialize in investor rights, we see another critical, nonpartisan reason to support the rule: When it comes to political spending, companies are often not as informed as one might think — especially when it comes to dark money.
- By mandating disclosure, the rule would allow investors to serve as a potential check on risky political donations, and help investors determine whether a company’s political spending habits make its shares a good investment in the first place.
- In theory, a company gives money to influence politics in its favor. But there are countless examples where dark-money spending has undermined their business interests. In fact, giving to dark-money groups may be the riskiest kind of political spending, because companies often have no idea who else is giving, and whether their interests are in competition….”
This issue is no doubt more significant in the US than it is in many other jurisdictions. In Canada, for instance, corporations don’t make contributions to federal parties. However, they can do so provincially (in some provinces), and as I write this post, such activity has recently been a topic of mild scandal here in Ontario. They may make other donations to groups that aren’t formally political parties but engage in lobbying or related activity. Among examples of the kind of situation that can arise, the Times article cites the following:
- “…in 2010 Target, a company that supports gay rights and has openly gay employees, donated $150,000 to a Minnesota organization called MN Forward, which advocates pro-business tax and economic development policies. But MN Forward ran TV ads supporting a candidate for governor who sought a state constitutional amendment banning same-sex marriage. When news about the donation came to light, the company faced an employee backlash and a boycott from consumers that ultimately resulted in a personal apology from Gregg Steinhafel, Target’s chief executive, and the formation of a committee to review the company’s political spending.”
I expect many readers will intuitively regard this as something to be addressed, if at all, by jurisdiction-specific regulations rather than by broadly applicable standard-setting. But it’s not self-evident that this should be the case. The basic objective of general purpose financial reporting is to “provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity.” Just taking that on its face, it seems information about such donations would often be self-evidently useful, for the reasons argued above. In response, one might argue that financial statements are focused on broadly portraying financial position and performance, rather on identifying specific decisions about expenditures. But then you have the requirements in IAS 24 to disclose information about compensation paid to key management personnel. The IASB says this is important because, among other reasons: “the structure and amount of compensation are major drivers in the implementation of the business strategy.” But if that’s the criterion, we should likely expect financial statements to address many items that are currently only covered in MD&A, if anywhere; strategically-driven payments and donations would certainly be among them.
Needless to say, I don’t think the IASB is likely to take on this issue in the foreseeable future. There’s no widespread demand for it, it would be difficult to define the disclosure requirement in a way that generated appropriate compliance across all jurisdictions, and as I said, it may seem like something better left to those individual jurisdictions anyway. But on the other hand, isn’t a large part of the point of IFRS to provide a consistent reference point for decision-making that transcends the flaws and omissions of local regulators? In such respects, the limits of IFRS may be set less by practicality or necessity than by collective lack of imagination and courage.
The opinions expressed are solely those of the author