This YouTube channel is a finance channel, and I mostly aim to avoid politics, but back
in April I made a bit of a slip by controversially endorsing Count Binface in his run for mayor
of London.
At the time I was pretty sure that Binface was guaranteed to win, and it seemed to me
that if I could be seen to endorse him that I might have some political influence going
forward.
It was quite a surprise to me when some other guy won the election and I was then forced
to flee London in fear of political retribution.
Yesterday, you might have seen in the news that Toyota decided to halt political donations
to certain Republicans who voted against the certification of President Biden's election
win.
Toyota’s political giving arm had donated a total of $56,000 to 38 of the Republican
members of Congress who voted to throw out the election results in January of this year,
that averages to just under $1500 per congressperson.
In their statement, Toyota pointed out that they equally supported Democrats and Republicans,
adding that the majority of their contributions went to Democrats and Republicans who supported
the certification of the 2020 election.
Corporate political donations are a fascinating subject.
They reek of corruption - where individuals or interest groups appear to be buying access
to political figures, and possibly requesting favorable legislation or government contracts
in return.
The whole question of companies or wealthy individuals funding political campaigns looks
suspicious.
There is an assumption that some sort of ‘quid pro quo’ must exist and that assumption
lies at the heart of most political finance legislation.
In the United States a 1907 act of Congress prohibits corporations from donating directly
to political campaigns and so as a work around, corporate executives and shareholders instead
create PACs (or political action committees), which funnel company raised money to a particular
political candidate.
Data on donations from corporate PACs is freely available from the Federal Election Commission
in the United States.
Companies don’t just give money to political organizations; they also frequently make charitable
contributions.
This can be controversial with shareholders too, as corporate philanthropy is inconsistent
with maximizing shareholder wealth, because giving money or other assets away contradicts
the profit-maximization purpose of a company.
Many argue that if corporate management want to donate money to a charity, they can donate
their own money - corporate funds belong to shareholders.
As you can imagine with both political and charitable donations, not every shareholder
is going to agree with the choices made by company management.
This is why Toyota got all of this bad press recently.
Fortunately, a lot of research exists on topics like this.
There is always going to be a conflict of interest in any relationship where one party
is expected to act in another parties’ best interests.
This is known as an agency problem in finance.
A company’s management team are supposed to always act as agents for the shareholders
and make decisions that maximize shareholder value, but they are often conflicted by their
desire to maximize their own wealth, or their influence in the world.
A paper by Liang and Reneboog from 2016 looked into corporate donations and shareholder value.
They analyzed corporate political donations around the 2010 UK elections and found no
positive effect on share price in companies that made political donations.
So, the money spent on political donations was effectively wasted – it provided no
benefit for the owners of the companies in question.
For charitable donations, they found that for the largest corporations’ charitable
donations were actually associated with higher shareholder returns.
At first this might not appear to make much
sense, but they put forth that these charitable donations could possibly function as an effective
marketing tool for the companies in question – improving their brands and their reputation
with consumers.
In addition, the donations might make employees of these firms feel better about where they
work.
This could both increase employee retention, and reduce salary costs.
The study points out that there are also some small tax savings associated with charitable
donations, and when all of these effects are combined, these donations might actually improve
corporate financial performance, or at least not harm it.
When they looked at the relationship between corporate donations and various indicators
of good corporate governance, the researchers found a small, but weak relationship between
political donations and indicators of poor corporate governance.
Companies with poison pills, CEO’ s who are also the chairperson of the board, and
firms with strong anti-takeover devices were more likely to make political donations.
These corporate structures are all things that strengthen the power of management relative
to that of shareholders.
In the paper they show that firms with a poison pill in place make political donations that
are 3.2% higher on average.
So the takeaway is that in situations where management are entrenched, they possibly make
political donations using company funds to strengthen their personal relationships with
influential people, doing this more for their own personal benefit than for the benefit
of shareholders.
The study didn’t find any relationship between corporate charitable donations and entrenched
management.
Companies with good and bad corporate governance structures seemed to donate similar amounts
of money to charities.
Another study that I found quite interesting was by Spenkuch, Garro and Fowler who analyzed
the stock performance of American companies that back winning candidates in elections.
The idea was to see if the stocks of companies that gave money to election winners performed
better, than those that gave money to election losers.
Markets usually react quickly to new information and so, they figured that stock performance
in the days after an election should be a good indication for how investors believe
an election will affect a company’s future success.
If a company’s stock price rose meaningfully after the election of a candidate that the
company had donated to, it might indicate that investors believe that the company has
better prospects because of the corporate donation.
Investors possibly expect that the company will get political favors, high-level insider
information, or see government policies put in place that are favorable to either the
company or its industry.
The team made a few surprising discoveries in their research.
Firstly, they found that larger and more successful companies tended to bet on candidates
that ended up winning, while smaller, weaker companies were more likely to support losing
candidates.
The reason for this is not entirely clear—it could be that more successful management teams
are just better at predicting future events, or it could be that already successful companies
are happy with the status quo and support consensus candidates, while less successful
companies are hoping for changes to occur and so spend money on candidates with a lower
chance of winning.
Whatever the reason, the companies that gave to election winners were likely to have higher-performing
stocks before the election than the companies that gave to losers and this outperformance
then continues after the election.
They argued that simply comparing the post-election price changes of companies that picked winners
versus losers could be meaningless, and just show stock price momentum in successful companies.
So, they moved on to analyze extremely close elections—those where the candidates’
vote tallies were within five percent of being a tie.
The thinking went that both big and small companies would have a fifty-fifty chance
in such scenarios of picking a winner.
They could then see if companies derive significant favors from their political donations.
They found that in these situations, the companies who had donated to a winning candidate saw
their stock price increase by point zero five percent.
Not only was this a tiny result, but it was also statistically insignificant, meaning
the results could be attributed to randomness.
In a final piece of research, the team looked at 119 Senate races between 2004 and 2010,
analyzing the relationship between changes in the gambling odds on each candidate, and
the stock performance of the companies that had donated to them.
They examined how the stock of a company reacted when their candidate’s probability of winning
changed.
Once again, they found no significant relationship.
So, in conclusion, the political connections that are forged by donating to politicians
don’t seem to be reflected in stock price performance, donations don’t appear to buy
meaningful political favors.
Several large companies, including Facebook, Microsoft and JPMorgan Chase, said they would
pull or review political donations after the events of January 6th.
It would appear that there is no upside for these companies, that they are squandering
shareholder wealth, and they run the risk of being attacked in the press for their political
affiliations.
Let me know your thoughts in the comments section.
I get the feeling that both investors in - and customers of - large companies would probably
be happier if the companies just got on with their core business rather than expressing
the values of management through spending investors’ money on political donations.
Some of this reminds me of a great piece of stand-up comedy by Stewart Lee, on “The
Values of The Carphone Warehouse”.
I’ll put a link to it below.
Do you follow the values of Jesus or Buddha or Marx?
No…
I follow the values of the Carphone Warehouse…
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