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Why investors should start asking Canadian companies to disclose their political spending

Photo by Mightydrake.

When you consider the political spending habits of corporations in the United States, it’s tempting to become smug about the apparent cleanliness of the Canadian political system.

But a report released Thursday by the Shareholder Association for Research and Education (SHARE) shows that investors, and the public more broadly, should be concerned about the political influence of Canadian companies.

Even small amounts of money can create reputational risks for companies, said Kevin Thomas, director of shareholder engagement for SHARE, an organization that specializes in responsible investment, research and education for institutional investors.

Not only do companies risk aligning with specific political agendas, but the public may also accuse the company of buying influence. Conversely, relationships with legislators could be damaged if the company supports the opposing party.

Even though these may be tiny donations that you wouldn’t notice on a balance sheet, they create significant liabilities for long-term investors, said Thomas.

If you consider the amount of pressure that companies have been under to act responsibly, it makes sense that investors are demanding more information about how companies are managing reputational risk. Put another way: activists and consumers have successfully scared some investors into taking their concerns seriously.

Investors in the U.S. are clearly worried about corporate political spending. There have been 530 shareholder proposals related to this issue in the last five years, making it the largest category of proposals. Meanwhile, the U.S. Securities and Exchange Commissions has its hands full with over one million comment letters on the topic.

But Canadian investors haven’t taken up the issue with the same gusto. And that’s where the SHARE’s “Dollars, Democracy and Disclosure” report comes in.

As the second instalment of a three-year project, the report describes with stark clarity the state of corporate political spending in Canada, and opens up a dialogue about the risks that these activities hold for investors.

While direct political contributions by corporations are either illegal or relatively small in Canada, the rubber really hits the road when you consider lobbying, said Thomas.

The TSX 60 is an index of 60 of the most valuable companies in Canada. Out of these companies, 80 per cent have active lobbyists in at least one jurisdiction, and more than half are lobbying in multiple jurisdictions, the report shows.

Not all jurisdictions in Canada require lobbyists to register, making it difficult to figure out how much influence these companies have across the country. Only half of the TSX 60 companies mention lobbying in their reports and only one – Telus – voluntarily offers the details of its lobbying activity.

But where public records are available, they show 956 lobbyists currently registered to the TSX 60 companies – an average of 16 lobbyists per company. Sixty per cent of those lobbyists are registered to oil and gas corporations, and two-thirds of these companies initiated almost 1,100 meetings with federal officials in 2014.

When trade associations are added to the mix, the image becomes even murkier.

When you look at the top five Canadian corporations lobbying the federal government in 2014, you get CN Rail, Telus, Shaw, Suncor and BlackBerry.

But when you include the trade associations of the top five Canadian corporations lobbying Ottawa, the list changes to Royal Bank, Suncor, Bombardier, SNC Lavalin and Teck Resources.

Almost half of the TSX 60 companies have membership in one of Canada’s four largest trade associations, but only nine companies disclose their trade association memberships.

This doesn’t even take into consideration funding for think tanks and advertisements, which influence public perception, especially during campaign years.

If you add up spending on lobbying, advertising and editorial content, contributions to trade associations and think thanks, it is clear that corporate political spending is a much bigger issue than just the amounts of money donated during election time, said the report.

More importantly, none of this spending is regulated, meaning companies are under no legal obligation to make this information public.

Investors are starting to see this as a problem and are considering whether or not Canadian companies should be forced to disclose their political spending.

Even though a political expenditure may be legal, it may not be in investors’ best interests – therefore it becomes an issue of “materiality,” said Thomas.

At its core, “materiality” is based on whether a reasonable investor’s decision to buy, sell or hold securities in a certain company would be influenced or changed if a certain piece of information was omitted or misstated. The key here is a “reasonable” investor; not an investor with a political, religious or otherwise personal agenda.

More simply, materiality is determined based on the shareholder’s right to know whether or not the company is operating in their best interest, which essentially means maximizing profits.

Maximizing profits used to be fairly straightforward: make as much money as possible in as little time as possible without thinking about the long-term consequences.

But, investors have begun adding new items to the list of issues that they consider material because activists are making it more difficult for companies to operate without a social license.

In other words, investors are becoming aware of the fact that a company’s reputation can affect their bottom line, and they want to know what companies are doing to manage those risks.

Derek Smith, senior counsel of the legal department at TD Bank Group, summed up the new definition of materiality as such: “If Stephen Colbert is making fun of a Canadian company on the Colbert Report, that problem is material.”

No other industry knows the pain of a bad reputation better than the mining industry.

“Without the social license [to operate] we’re not welcome anywhere and we’re not mining, period.” said Louise Grondin, senior vice-president of environment and sustainable development at Agnico Eagle Mines.

To improve its reputation and show its economic value to communities, Agnico Eagle Mines worked with a non-profit organization called Publish What You Pay Canada and the Mining Association of Canada to come up with a set of recommendations that would require oil, gas and mining companies to disclose how much they pay governments, at home and abroad, for access to their resources.

The idea is that if communities can see how much money their governments receive from mining companies, they will be able to hold their political leaders accountable for this money rather than fighting with mining companies.

“It was clearly the right things to do from the corporate citizen point of view,” said Grondin. But without the push from society, it wouldn’t have happened, and the Canadian government would not have adopted the extractive transparency legislation last year.

The pressure cooker that companies are in is merging the interests of shareholders and citizens in a way that hasn’t been seen before.

Citizens obviously have a right to know who and what is influencing government. Investors also have a right to know if companies are taking political risks with their money, said Thomas.

“They’re two different kinds of accountability, but they both add up to a much cleaner political process in the end,” he said.

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