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E-MailLeo E. Strine, Jr. is the Michael L. Wachter Distinguished Fellow at the University of Pennsylvania Carey Law School; Senior Fellow, Harvard Program on Corporate Governance; of counsel, Wachtell, Lipton, Rosen & Katz; and former Chief Justice and Chancellor, the State of Delaware; and Dorothy S. Lund is Assistant Professor of Law at the University of Southern California Gould School of Law. This post is based on their recent article, published in the Harvard Business Review. Related research from the Program on Corporate Governance includes Corporate Political Speech: Who Decides? by Lucian Bebchuk and Robert J. Jackson Jr. (discussed on the Forum here); The Untenable Case for Keeping Investors in the Dark by Lucian Bebchuk, Robert J. Jackson Jr., James David Nelson, and Roberto Tallarita (discussed on the Forum here); and The Politics of CEOs by Alma Cohen, Moshe Hazan, Roberto Tallarita, and David Weiss (discussed on the Forum here).
In our article, Corporate Political Spending is Bad Business, we explore the deep problems that corporate political spending poses for corporations and their management. In particular, we highlight the lack of legitimacy underpinning management decisions to spend treasury dollars on political causes as well as the “hypocrisy trap” for companies that donate to causes that undermine their stated values.
The legitimacy problem is easy to understand. Under the traditional division of power in U.S. corporations, managers decide how to allocate corporate assets, and shareholders are entitled to a say on those decisions only if they involve certain fundamental transactions. Thus, even as corporate political spending has soared since Citizens United, shareholders have had no real say in the matter. Corporate leaders have not chosen to seek their approval for political donations, and most have not even disclosed their contributions—despite the fact that shareholders are paying for them with their entrusted capital.
Even when it comes to traditional business decisions, academic research has focused for years on the reality that management does not always use its control of a company’s money to benefit the company and its shareholders, whether out of myopia or self-interest. In the fields of corporate finance and governance, this is referred to as an agency problem. Of course, the misalignment is especially pronounced when the decision is about which politicians or parties should benefit from corporate largesse—an issue on which shareholders have no common interest. Shareholders have diverse political views and—as we highlight—no interest in electing candidates just because they support one company’s preferred regulatory policies. The ability of corporate managers, who understandably have their own political views, to make contributions in a way that is faithful to their investors’ diverse interests and opinions is rightly suspect, and for that reason, demand is growing for shareholders to be given more information about and more say over corporate political spending.
Investors are not alone in opposing this state of affairs. Our conversations with corporate leaders reveal that many of them are tiring of the current system because it distracts them and shifts resources away from other, value-creating activities. Indeed, companies’ “freedom” to donate to politicians after Citizens United ultimately led to a trap for corporate management. Under prior law, when corporations could not say yes to solicitations for political donations, they were not even asked. They could give through a PAC only, and that arrangement put limits on fundraising and spending. Instead of being forced to support positions and candidates that their investors, customers, and employees disfavored, executives could focus on their core job of running their businesses.
After Citizens United, politicians, political party committees, and industry groups knew that corporations could spend as much as they wished. That put executives under pressure to give. Now that political donations are unrestricted, it’s hard to say no. And once an executive says yes to one, pressure comes to say yes to all. How can you give to just the Republican members of the Senate Finance Committee? Or just the Democratic members of the House Committee on Energy and Commerce? Furthermore, managers may rationally fear that by failing to give when all other companies are giving, they will lose the ability to influence regulation. Thus corporate political spending has become a dangerous and unprincipled game, leading many business leaders to long for the old rules.
These conditions are exacerbated by increased concern over EESG and corporate social responsibility. Corporations are facing pressure from employees, customers, society, and even investors to be more aware of the effects of their conduct. Executives are responding by speaking out on climate change, racial and gender diversity, employee rights, and even hot-button issues such as reparations and a woman’s right to choose. And yet pressure persists to donate to candidates and legislators, particularly those who favor the company’s preferred regulatory policies, putting the company at an almost unavoidable risk of ensnaring itself in this “hypocrisy trap.”
Beyond highlighting these risks, we offer solutions for corporations wishing to reform their political spending practices. The best business practice would be to pledge that the corporation will make no donations with treasury funds and to limit involvement in the political process to lobbying or speaking up on issues that the board has deemed consistent with the company’s values. If a company lacks the will to ban political contributions entirely, it should commit to giving only through a PAC that raises voluntary money from employees and shareholders. Even then, the company should commit to having the PAC give only to candidates and committees whose full range of views align with the company’s stated purpose and values. Our article provides further detail on the steps that companies should take under these approaches, either of which would improve legitimacy of corporate spending and reduce associated risk.
The complete article is available for download here.
One Comment
Summary: Bribery too suffers from agency problems. Collective decisions to bribe aren’t possible because everyone has an interest in bribing specific people only if those bribed also align with the bribers’ political views. Corporations thus risk offending investors by involuntarily bribing officials for corporate gain or over bribing so not to bribe one particular party. To reduce costs and avoid offending politically minded investors, the authors propose that corporations should only facilitate collective, voluntary bribery rather than bribe politicians without stakeholder say.
I hope a new generation of Americans realize at some point the deep flaw in the “High” Court holding bribery with a few extra steps is constitutionally protected speech.