Corporate Campaign Spending: Giving Shareholders A Voice
In Citizens United, decided January 21, 2010, the U.S. Supreme Court gave an unequivocal green light for corporate money in elections, by outlawing under the First Amendment, laws that limit corporate spending in elections. This radical decision overturned more than 100 years of settled law. While it is difficult to know how distorting an effect on our democratic electoral processes this decision will have, it is reasonable to expect a significant increase in corporate expenditures.
Corporate law is ill-prepared for this new age of corporate political spending by publicly-traded companies. Today, corporate managers need not disclose to their investors – individuals, mutual funds, or institutional investors such as government or union pension funds – how funds from the corporate treasury are being spent, either before or after the fact. And the law does not require corporate managers to seek shareholder authorization before making political expenditures with corporate funds.
This report proposes changes in corporate law to adapt to the post-Citizens United reality. Two specific reforms are suggested: first, require managers to report corporate political spending directly to shareholders, and second, require managers to obtain authorization from shareholders before making political expenditures with corporate treasury funds. Modeled on existing British law, these changes will ensure that shareholders’ funds are used for political spending only if that is how the shareholders want their money spent.
This report represents the first of several proposed “fixes” to the damage done to American democracy by the Supreme Court’s Citizens United decision. The Brennan Center will also be releasing proposals to develop public funding systems that build on grassroots participation with matching funds. We will also be working to develop an alternative constitutional paradigm to the disastrous and radical view of the 1st Amendment adopted by a conservative majority of the Supreme Court. We will also continue working to repair voter registration systems through federal legislation that could bring millions more voters onto the registration rolls and reduce fraud and abuse. If our democratic system is permitted to be overrun with corporate spending, we can expect increased public cynicism about our institutions of government and further erosion in the public’s trust in our democratic system.
--Foreword by Susan Liss, Director of the Democracy Project at the Brennan Center
The Supreme Court has radically altered the legal landscape for politics with the 5-4 decision in the case Citizens United v. FEC, handed down on January 21, 2010. Turning back decades of statutory law, the Court has elevated the First Amendment rights of corporations to speak during elections, and has created a new paradigm for how political campaigns may be funded. The way that corporations “speak” is by spending money, usually to purchase advertisements that most individuals could not afford to finance.
Now that the Court has held that publicly-traded corporations have the same First Amendment protections as individuals, limitations on Congress’ ability to regulate their spending will be severely constrained. That means that corporate treasury money–including the funds invested by individuals, mutual funds, pension funds and other institutional investors–can be spent on politics without alerting investors either before or after the fact. Under current laws regulating corporations, there is nothing that requires corporations to disclose to shareholders whether funds are being used to fund politicians or ballot measures, or how the political money is being spent. Moreover, shareholders have no opportunity to consent to the political use of corporate funds.
This does not have to be the case. Britain has an alterative approach. In the U.K., companies disclose past political expenditures directly to shareholders. And more importantly, shareholders must authorize corporate political spending before a corporation uses shareholder funds on political spending.
This report argues for the United States to change its securities laws in the wake of Citizens United to
(1) provide notice to shareholders of any and all corporate political spending and
(2) to require shareholder authorization of future corporate political spending.
The U.S. should adopt the British approach to political expenditures by
- requiring disclosure of political spending directly to shareholders,
- mandating that corporations obtain the consent of shareholders before making political expenditures, and
- holding corporate directors personally liable for violations of these policies.
This approach will empower shareholders to affect how their money is spent. It also may preserve more corporate assets by limiting the spending of corporate money on political expenditures. A section-by-section summary outlining one proposed legislative fix is attached as Appendix B.
As explained in Chapter 2 of this report, currently, the disclosure of corporate political spending is inconsistent, keeping shareholders in the dark about whether their investment money is being used in politics. At the very least, Congress should require corporations to disclose their political spending, as many top firms have already volunteered to do. At the urging of the Center for Political Accountability, 70 companies, 48 of which are in the S&P 100, have agreed to disclose all of their political spending to shareholders.
To be useful, disclosure of political spending under this proposal should be frequent enough to notify shareholders and the investing public of corporate spending habits, and yet with enough of a time lag between reports so that corporations are not unduly burdened. To accommodate these two competing goals, disclosure of political expenditures should occur quarterly to coincide with company’s filing of its Form 10-Qs with SEC. Because the political disclosure will be contemporaneous with the 10-Q filing, transaction costs can be minimized.
The Brennan Center is not alone in calling for more transparency in corporate political activity. The Center for Political Accountability, Interfaith Center on Corporate Responsibility, Common Cause, and the Nathan Cummings Foundation, to name just a few, have all pushed for better disclosure of political spending by corporations.
But disclosure alone is not enough. Congress should act to protect shareholders by giving them the power, under statute, to authorize political spending by corporations. The voting mechanics would work in the following way: At the annual meeting of shareholders (a.k.a., the “AGM”), a corporation that wishes to make political expenditures in the coming year should propose a resolution on political spending which articulates how much the company wishes to spend on politics. If the resolution gains the vote of the majority of the outstanding shares (50% plus 1 share), then the resolution will be effective, and the company will be able to spend corporate treasury funds on political matters in the amount specified in the resolution. However, if the vote fails to garner the necessary majority, then the corporation must refrain from political spending until the shareholders affirmatively vote in favor of a political budget for the company.
Finally, to ensure that this reform has teeth, another aspect of British law should be duplicated: personal director liability. Directors of U.S. companies who make unauthorized political expenditures using company funds should be personally liable to the company for the unauthorized amount.
Our support for the British model is grounded in concerns about administration and transaction costs. A system which puts every political action of a corporation to a vote would be costly and unwieldy to administer. By contrast, under this proposal, the corporation can simply add an additional question (on authorization of the political budget) to the list of items which are regularly subject to a shareholder vote at the annual meeting, alongside such traditional matters as the election of the board of directors or appointing auditors.
In summary, to improve American corporate governance, the U.S. should change its securities laws to mirror current British law in this area, and should require publicly-traded companies to:
- report their political spending directly to their shareholders on a periodic basis, and
- get shareholders’ authorization before spending corporate treasury funds on politics.
- In addition, any unauthorized political spending should result in personal liability for directors.
These changes should be made at a federal level to put all publicly-traded companies on an equal playing field.
Justice Kennedy’s opinion in Citizens United is correct that “transparency enables the electorate to make informed decisions and give proper weight to different speakers and messages.”102 But he was mistaken in thinking that the necessary transparency for shareholders and the investing public is already in place.
These proposed changes to U.S. securities law will provide enhanced shareholder rights through greater transparency of corporate political spending, and will ensure that when corporations spend other people’s money on politics, that they do so with full informed consent. The net effect of similar laws in Britain appears to have curbed corporate political spending. These reforms could moderate the role of corporate money in American politics in a post-Citizens United world.
Campaign finance laws can be crafted to promote more open, honest, and accountable government and to bring the constitutional ideal of political equality closer to reality. The Brennan Center supports disclosure requirements that inform voters about potential influences on elected officials, contribution limits that mitigate the real and perceived influence of donors on those officials, and public funding that preserves the significance of voters’ voices in the political process. The Brennan Center defends federal, state, and local campaign finance and public finance laws in court and gives legal guidance and support to state and local campaign finance reformers through informative publications and testimony in support of reform proposals.
Ciara Torres-Spelliscy is Counsel for the Democracy Program at the Brennan Center, working on campaign finance reform and fair courts. Ms. Torres-Spelliscy earned her B.A. magna cum laude from Harvard. She earned her J.D. from Columbia Law School. She is the co-author along with Ari Weisbard of What Albany Could Learn from New York City: A Model of Meaningful Campaign Finance Reform in Action, 1 Albany Gov’t L.R. 194 (2008); Electoral Competition and Low Contribution Limits (2009) with co-authors Kahlil Williams and Dr. Thomas Stratmann; and Improving Judicial Diversity (2008) with co-authors Monique Chase and Emma Greenman, which was republished by Thompson West Reuters in Women and the Law (2009), as well as author of Corporate Political Spending & Shareholders’ Rights: Why the U.S. Should Adopt the British Approach (forthcoming 2010). She has been published in the New York Law Journal, Roll Call, Business Week, Forbes, The Root.com, Salon.com, CNN.com and the ABA Judges Journal. She has also been quoted by the media in The Economist, The National Journal, Sirius Radio and NPR. She provides constitutional and legislative guidance to lawmakers who are drafting bills. Before joining the Center, she worked as a corporate associate at the law firm of Arnold & Porter LLP and was a staff member of Senator Richard Durbin.
"Corporate Campaigning", Ciara Torres-Spelliscy, Forbes (01/29/2010)
"A Bad Call on Campaign Finance," Ciara Torres-Spelliscy, CNN.com (01/21/2010)
"Shareholders Should Hear About Political Spending", Ciara Torres-Spelliscy, BusinessWeek (10/22/2009)
"Keep My Investments Out Of Politics", Ciara Torres-Spelliscy, Forbes (09/03/2009)
"Is Your 401(k) Used to Influence Congress?", Ciara Torres-Spelliscy, Roll Call (08/06/2009)