Campaign Finance and Shareholder Protection

November 6, 2009

What is the Proper Role of Corporate Money in our Democratic Process?

In the Citizens United v. FEC case, the U.S. Supreme Court recently reached out to raise an important question for our American democracy: what should be the appropriate role of corporate money in elections? To answer that question, it is essential to understand the risks posed to democracy and to corporate shareholders by corporate political spending.  

First, the risk to the democracy. Corporate political spending may seek to "buy" policies which are antithetical to the common good, instead benefiting only the company or industry doing the spending. For the shareholder, the risk attaches to the pocketbook. It is possible -- and studies such as Corporate Political Contributions: Investment or Agency? by Rajesh Aggarwal, Felix Meschke, and Tracy Wang have shown that corporate political contributions may not result in the policies that corporate managers are trying to "buy". Thus, spending corporate money on politics may have no end and yet be an utter waste of corporate dollars. There are negative results either way: If a corporation can buy self-serving public policies, it damages the polity; if a corporation cannot buy policy, then they have hurt their shareholders by trying. 

A century's worth of American election laws have prohibited corporate managers from spending a corporation's general treasury funds in federal elections. These laws have protected shareholder interests by making corporate treasury funds off limits to managers who might be tempted to spend this corporate money to support a personal favorite on the ballot.

Existing federal laws require corporate managers to make political expenditures via separate segregated funds (SSFs), which are also commonly known as corporate political action committees (PACs), so that shareholders, officers and managers who would like the corporation to advance a political agenda can designate funds for that particular purpose. This scheme provides some First Amendment protections for "corporate speech", but limits corporate influence on an election since the amount of funds that can be raised and contributed by PAC's are subject to strict limits.

These laws protect both the integrity of the democratic process as well as shareholders. Recognizing the wisdom of this approach, many states followed suit with similar laws, but in the 28 states that lack federal-style election rules, corporations may give political donations to candidates directly from their corporate treasuries. This money is used in such states to pay for expenditures in legislative, executive and judicial elections, without consent from or notice to shareholders.

The laws that require corporations to pay for political expenditures only through corporate PACs are under legal attack. In early September 2009, the Supreme Court heard a rare re-argument in Citizens United v. FEC. In ordering the rehearing, the Court asked the parties to address whether to overrule Austin v. Michigan Chamber of Commerce and part of McConnell v. FEC-- two cases which upheld the right of the government to require corporations to conduct political spending only through corporate PACs. Although no one can predict for sure what the outcome will be, most Court watchers expect that the Supreme Court will use Citizens United as an opportunity to expand corporate speech rights by overturning Austin's and/or McConnell's limits on corporate political spending. The Court may turn the clock back to before 1947, the year Congress outlawed corporate and union independent expenditures in federal elections in Taft-Hartley.

Policy Responses if the Supreme Court Allows Corporate Money into Federal Politics

States' corporate law and federal securities law -- for the most part -- do not address the issues that will arise with the advent of unfettered corporate treasury spending by managers. For years, courts have largely turned a blind eye to managerial decisions to spend corporate money on politics. Using what is known as the "business judgment rule," state courts have allowed corporate managers to spend corporate treasury money on politics. (In all states, corporations can use corporate money on ballot measures, and in 28 states, corporations can use corporate money on candidate elections). There are no clear standards under state corporate law about what corporate political spending would or would not be a waste of corporate assets. Furthermore, there are no federal laws or regulations requiring boards to report such spending to shareholders or requiring shareholders to approve political spending. 

Should shareholders discover large or imprudent corporate political expenditures, they have very little recourse under current law. A suit for breach of fiduciary duty would likely be in vain. Shareholders would be faced with two unsatisfying solutions: either they could try to vote out the board or they can sell their stock -- possibly at a loss. Thus, shareholders cannot provide a meaningful check on managerial whims to spend corporate money on politics.

Consequently, the laws should be changed to give shareholders more say about the use of their investments in politics. We suggest the following two changes to federal securities laws:

1. Publicly-traded companies should give their shareholders notice of political spending on a regular basis

and

2. Corporations should be required to get shareholder authorization before a corporation may spend money on politics. (This is required under British corporate law.) 

Related Policy Papers

Corporate Political Spending & Shareholders’ Rights: Why the U.S. Should Adopt the British Approach explains the history of corporate and campaign finance laws' treatment of corporate political spending. It suggests that America should follow the example of the British, who currently require notice to shareholders of corporate political spending as well as prior shareholder approval of corporate political spending. This paper contains model language for future legislation.

Corporate Campaign Spending: Giving Shareholders a Voice, Brennan Center, 2010

Further reading

"Corporate Campaigning", Ciara Torres-Spelliscy, Forbes, January 28, 2010

"A Bad Call on Campaign Finance," Ciara Torres-Spelliscy, CNN.com, January 21, 2010

"Shareholders Should Hear About Political Spending" Business Week, October 22, 2009

"Keep My Investments Out Of Politics" Forbes, September 3, 2009 

"Is Your 401(k) Used to Influence Congress?" Roll Call, August 6, 2009