The Magazine of Corporate Responsibility

Citizens United: Waking a Sleeping Giant

by Ciara Torres-Spelliscy
Brennan Center for Justice at NYU Law School

As Professor Barry Friedman and Dahlia Lithwick noted in a recent piece, the Roberts Supreme Court is usually pretty savvy about gauging public opinion and acting accordingly, but when they decided Citizens United, they grossly misread the mood of the American public. They must have thought that this would be a little-noticed change to campaign finance minutia. Instead headlines from all over the country howled about the invitation of corporate money into American elections. Unwittingly, Citizens United, roused a sleeping giant, the American investor.

US Supreme CourtMaybe it’s the backdrop of the Great Recession juxtaposed with another record year for Wall St., but for whatever reason, Citizens United hit a raw nerve. One of the reasons that this is such an objectionable decision is it allows corporate managers in publicly traded companies to spend what Justice Brandeis called “other people’s money.” And as the Brennan Center noted in Congressional testimony right after the decision was announced, this raises a host of corporate governance issues.

Citizens United allows unlimited corporate and union spending in local, state and federal elections. Now that the 2010 election is in full swing, we can see the jump in outside money. And when they know about corporate political spending, shareholders are objecting. For example, Target’s institutional investors wanted to know how $150,000 got into the Governor’s race in Minnesota. Meanwhile, investors such as the Nathan Cummings Foundation are objecting to spending from News Corp. and the Investor Network on Climate Risk is focusing on spending by oil companies.

But frustratingly, much of the money being spent in the midterm election is secret– masked through the use of tax-exempt non-profits like trade associations. This secretive corporate political spending leaves voters and shareholders equally in the dark about the source of the funds. And this study from Investor Responsibility Research Center shows how far we need to go, finding 86% of the S&P 500 does not have stated policies on indirect political spending via contributions to trade associations and non-profit interest groups.

If American shareholders track likely voters who object to the holding in Citizens United by a margin of 4-1, then a goodly portion of shareholders are probably also displeased with the right of corporate managers to spend corporate money in this way. With roughly one out of every two American households invested, that is a lot of potential anger about the use of corporate funds in elections.

More than in any election since Watergate, in the 2010 midterm election obfuscation is winning over transparency. This was not inevitable and it needs to be fixed before the 2012 presidential election. We can address this by getting serious about changing state corporate law and federal securities law.

As Professor John Coates has noted, Citizens United has radically unsettled the expectations of corporate managers, shareholders and creditors alike. And as Professor John Coffee has argued corporate spending through trade associations thwarts accountability to shareholders. Both professors agree that at the very least, we need more transparency surrounding corporate political spending.

But is this where we should end the discussion of corporate governance after Citizens United? I think not. Here the problem is not just that shareholders are unwittingly funding corporate political expenditures, it is that there is no mechanism under corporate law for them to register their consent or objection, short of selling their shares. As I have argued here and here, we need something akin to the British approach which allows shareholders a vote on political spending. And Professors Lucian Bebchuk and Robert Jackson contend, states can adopt even more stringent controls like requiring approval of political expenditures by independent directors or requiring super-majority shareholder votes to protect the interests of minority shareholders.

Legislation to address this problem is waiting in the wings. Both disclosure and a shareholder vote could be addressed by the Shareholder Protection Act (H.R. 4790). This bill would require shareholder approval before publicly-traded corporation can spend money on politics. Furthermore, corporations are required by the Act to report where they have spent the money. Congress can adopt this bill in the lame duck session after the election.

It is not too late to act to protect shareholders. We still have time to fix this problem before the 2012 election. Because once a presidential race is at stake, even the corporate managers who sat on the sidelines this time around, may find the new Citizens United authority to spend other people’s money in politics too irresistible to pass up.

Ciara Torres-Spelliscy is Counsel at the Brennan Center for Justice at NYU School of Law and Adjunct Professor of Constitutional Law at Rutgers University.

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1 Responses »

  1. "One of the reasons that this is such an objectionable decision is it allows corporate managers in publicly traded companies to spend what Justice Brandeis called 'other people’s money.'"

    Don't let the US government get wind that this is a bad thing.

    I understand the premise: that shareholders should have a say in how their money is spent and as soon as you make it political, it gets a bit hairy because someone could be spending your money, that was intended purely to be a financial investment, to assist a politician that you don't support. However, I would ask, why is the company supporting a certain candidate to begin with? Is it just to support an old pal or to better their company? If many oil companies support a certain candidate(s), isn't that a sign that they see these candidates as the best hope, from a government standpoint, for the future productivity of their industry? And isn't that what the companies are supposed to do anyway? Why would a shareholder object to creating an atmosphere that would allow the company they invest in to thrive?
    But, this is about rights. Shouldn't the shareholders still retain the right to object? What do shareholders typically vote on? Do they need to approve of every investment decision - large and small? (I really don't know) If so, then it would seem like a no-brainer to adopt this legislation. But, if political spending somehow becomes a special issue simply because parties and names are attached, then I think the decision-makers in the companies are having a sphere of influence cut off from them by those who are only viewing this situation through a political lens; not a financial one.

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