Corporate Law and Political Spending

Last week we presented our article, Corporate Political Speech: Who Decides?, at the Harvard Law Review’s annual Supreme Court Forum. The article is featured in the Review’s Supreme Court issue.

The final version of the paper includes a substantial addition from prior versions: A section assembling empirical evidence on the potential financial significance of political speech. The evidence shows that there is a basis for believing that public corporations may expend material amounts of corporate resources on political speech—and that, using the expanded freedom provided under recent Supreme Court decisions, may well spend even more in the future.

To begin, we provide empirical evidence suggesting that public companies channel substantial amounts of political spending through intermediaries. For example, by assembling data drawn from public filings by five large intermediaries supported by business organizations, we find that these intermediaries have spent more than $130 million on lobbying and politics in 2008 alone. Current law does not require these intermediaries to disclose how much they receive from any public corporation or from public corporations in the aggregate.

We also provide evidence suggesting that companies’ relatively new freedom to spend corporate funds in connection with elections will lead to a material increase in corporate political spending. While public corporations have been precluded from spending corporate funds on elections, they have been free to sponsor corporate political action committees (PACs) that raise funds from executives and other employees for political spending. We estimate that, during the 2007–2008 election cycle, business PACs spent over $300 million at the national level alone.

Corporate PACs are funded through the personal wealth of executives and other employees, not corporate treasuries. Now that companies are permitted to use corporate funds for indirect support of candidates, executives may prefer to replace some of the amounts spent by corporate PACs with spending from corporate treasuries, since the costs of the latter type of spending are to a substantial extent borne by shareholders. Alternatively, executives may supplement PAC funds, which may be used for direct support of candidates, with corporate political spending designed to provide indirect support.

Our analysis shows that there is no basis for dismissing corporate political spending as an issue that lacks material financial significance for shareholders. We also highlight the lack of transparency associated with corporate political spending. We therefore propose detailed rules that would mandate disclosure of the amounts and beneficiaries of any funds that a public company spends, either directly or indirectly through intermediaries, on politics.

In addition, our analysis of the divergence between the interests of directors and executives those of shareholders with respect to corporate political spending leads us to conclude that public companies’ political spending decisions should not be subject to the same decisional rules as ordinary business decisions. In particular, we propose a blueprint of corporate law rules that would

• (i) Provide shareholders with a role in determining the amount and targets of corporate political spending;
• (ii) Require that corporate political speech decisions be overseen by directors who are independent from management; and
• (iii) Allow shareholders to opt out of—that is, either tighten or relax—the rules governing the role of shareholders and independent directors with respect to political spending.

Our paper is available here.