American shareholders lack the ability to consent to political spending by corporations. Indeed, because of gaps between corporate and campaign finance law, U.S. corporations can make political expenditures without giving shareholders any notice of the spending either before or after the fact. This is problematic because the political interests of the managers who spend the corporate money may diverge from the political interests of shareholders who provided the funding.
By contrast, British companies must seek permission from shareholders to make political expenditures under the Political Parties, Elections and Referendums Act of 2000 and must report such spending to U.K. shareholders on an annual basis.
Shareholders in U.S. companies have been protected by a century’s worth of election laws which limited the amount of money that could be spent in federal elections by corporations, unions and banks. Corporations are required to pay for federal political expenditures through corporate political action committees (PAC's). This PAC requirement was struck in Citizens United, a Supreme Court decision dated January 21, 2010.
The federal corporate PAC requirement safeguarded the interests of shareholders in particular because most investors are unaware of how, when or why corporations make political expenditures. For example, in states that lack federal-style election rules, corporations may give political donations directly from their corporate treasuries (money in the corporate treasury includes funds from the sale of stocks and products). Corporations can spend money on politics without consent from or notice to shareholders.
The shareholder may not know who the corporation supports or may even actively disagree with who the corporation supports. By contrast, if a shareholder chooses to give to a corporate PAC, then the shareholder is fully on notice that the money will be used for a political purpose and there is meaningful consent in the transaction.
The laws that require corporations to pay for political expenditures through corporate PAC's are under legal attack in the courts. Most recently, the Supreme Court overruled Austin v. Michigan Chamber of Commerce and part of McConnell v. Federal Election Commission-two cases which required corporations to conduct political spending through corporate PAC's.
The Supreme Court used Citizens United as an opportunity to expand corporate speech rights. This new development in the law has hurt shareholders by allowing corporate managers to use corporate treasury funds to make political expenditures.
A recent study, “Corporate Political Contributions: Investment or Agency?” by Aggarwal, Meschke, and Wang (2009) found that large corporate political expenditures are linked with lower shareholder value and poor corporate management. In other words, managers make political donations because they want to, not because giving will necessarily benefit the corporations they manage. Overruling Austin and part of McConnell will give poor managers even more venues in which to spend shareholders’ investments on political expenses.
By exploring both campaign finance law and corporate law, this paper, “Political Spending & Shareholders’ Rights,” will argue that the U.S. should adopt the British approach to corporate political expenditures. In the first instance, U.S. corporations should disclose their political spending directly to shareholders and they should give shareholders the opportunity to consent to political spending. These reforms will improve corporate governance and minimize corporate risk.
The need for this reform has become heightened with the Supreme Court’s Citizens United decision. In a world where corporations can spend an unlimited amount corporate treasury funds on federal and state elections, shareholders will need new protections to guard against self-interested political spending by corporate managers.
