The Supreme Court’s January 2010 Citizens United decision to permit corporations to spend unlimited sums to influence federal elections was premised on a pair of yet-unfulfilled promises: Corporations would disclose their expenditures, and shareholders would be able to police such spending. The best chance to fulfill those promises may now rest with the Securities and Exchange Commission. The SEC could require disclosure of political spending by public companies and facilitate action by shareholders to sign off on such spending.

Contrary to the consensus view, however, SEC action may prove to be a favor to the owners of the affected corporations. Despite reflexive opposition to the disclosure of political spending from many self-appointed business advocates, research we have published suggests that disclosure of political activity might benefit corporate valuations and, at the least, mandatory disclosure would pose no threat of a detrimental effect.

For decades, conservatives opposed regulation of campaign spending in favor of unlimited spending with full disclosure. Post columnist George F. Will once proposed boiling down campaign regulation to “seven words: no cash, full disclosure, no foreign money.” In Citizens United v. Federal Election Commission, Justice Anthony M. Kennedy embraced this vision, writing for the majority: “With the advent of the Internet, prompt disclosure of expenditures can provide shareholders and citizens with the information needed to hold corporations and elected officials accountable for their positions and supporters.”

But when Citizens United was decided, FEC rules did not require disclosure of corporate political spending. Of $266 million spent by outside groups in 2010, nearly half was spent by groups that revealed nothing about their funders. The undisclosed portion amounted to double the total spending by outside groups in 2006, the previous midterm election.

So far, efforts to close the disclosure gap have failed. Comprehensive disclosure reform should come from Congress, but congressional action may be hard to achieve. Last year, a bill requiring the reporting of any donor giving $1,000 or more for a campaign ad passed the House, but the legislation fell one vote short of overcoming a filibuster in the Senate. The FEC is deadlocked. A draft executive order aimed at government contractors was leaked but not issued. The SEC, then, looks to be the best bet for fulfilling Justice Kennedy’s promise that corporate political activity would be disclosed.

Amid these developments, a common assumption has been that, whether corporate political activity is good for the country, it is good for corporate shareholders. Why else would corporations want to get involved in politics?

Counter to those perceptions, however, several studies suggest that companies seeking political advantage may not be doing their shareholders any favors. Rather, such activity may reflect the interests of corporate managers and benefit shareholders less than other possible uses of their money. Politically active public companies are less valued by the market, and companies with better corporate governance — including the presence of large, active shareholders — are less politically active.

What about disclosure? We analyzed market valuations of 80 companies in the Standard & Poor’s 500 that have policies calling for disclosure of electioneering activities. In particular, we compared the price-to-book ratios of those companies with other S&P 500 companies in the same industries. After controlling for size, leverage, research and development, growth and political activity, we found that companies with disclosure policies had a 7.5 percent higher industry-adjusted price-to-book ratio than other firms.

Given data limitations, we cannot claim disclosure policies cause higher price-to-book ratios, only that companies with pro-disclosure policies are generally more valuable. But our data, which are from 2010, are inconsistent with claims that disclosure will harm corporations, and they are consistent with the idea that well-managed companies responsive to shareholder concerns tend to be valued more highly than other companies.

The voluntary disclosure policies that provided the basis for our analysis are encouraging. But such policies are inconsistent, sometimes incomplete and lack enforcement mechanisms. For a typical investor, the question is whether corporate political activity overall is valuable. Voluntary disclosures by a small fraction of public companies cannot answer that question.

Citizens United opened up a brave new world in which corporations could spend unlimited sums to influence federal elections in exchange for having their expenditures monitored by their shareholders and the public at large. Only half of this promise has been fulfilled. It’s up to the SEC to make good on the other half.

John C. Coates is a professor of law and economics at Harvard Law School. Taylor Lincoln is research director of Public Citizen’s Congress Watch division.  This article was first published in The Washington Post and is republished with permission of the authors.

The U.S. Supreme Court’s decision last January in Citizens United – giving corporations and unions new freedom to contribute to political campaigns - is beginning to have an impact.

Human Rights Campaign Ad

Retailers Target and Best Buy, both headquartered in Minnesota, are among the first companies to encounter public controversy following their political contributions to an organization that backs a state gubernatorial candidate who opposes gay marriage.

Target has contributed $150,000 and Best Buy $100,000 to MN Forward, an independent expenditure committee that has taken out ads in support of Tom Emmer, a Republican state lawmaker.

The contributions have drawn widespread media coverage and criticism from customers and organizations such as Human Rights Campaign, a national advocacy group for lesbian, gay, bisexual and transgender (LGBT) rights.

Human Rights Campaign took out an ad in the Minneapolis StarTribune addressing the two companies: “With the Supreme Court’s decision in Citizens United, the landscape for political contributions has changed in ways that no one fully appreciates yet. Your foray into this uncharted water has proved choppy and should serve as a warning to other corporations mindful of the perceptions of LGBT and allied consumers.”

In an email to Target employees, CEO Gregg Steinhafel said the contribution to MN Forward was based on the company’s desire to foster economic growth in the state.

“Target has a history of supporting organizations and candidates, on both sides of the aisle, who seek to advance policies aligned with our business objectives, such as job creation and economic growth,” he said.  “MN Forward is focused specifically on those issues and is committed to supporting candidates from any party who will work to improve the state's job climate.”

In a statement, Target said it has had "multiple conversations" with the Human Rights Campaign in recent weeks and hoped to "continue to work with the HRC in a spirit of mutual cooperation."  Referring to its employees and customers, the company added, "We are committed to doing better and regret that we have let down our team members and guests. We are evaluating ways to make sure they know the high value we place on our relationships with them."

Best Buy, in a statement, said: “Best Buy’s political giving strategy – and our decision to support MN Forward – is based solely on the need to help elect candidates who will make jobs and economic issues a top priority this election.  We are a business in an industry highly sensitive to consumer uncertainty, unemployment and market instability; a successful economic recovery is critical to Best Buy.  Best Buy joined other Minnesota businesses in supporting the objectives of MN Forward."

Best Buy said because it believes "employees, shareholders and customers have a right to know how Best Buy engages politically," it informed employees of the MN Forward contribution.  It said it also posts its political policy and annual activity report on a section of the company web site that focuses on advocacy initiatives.

Ironically, both Target and Best Buy have been considered “model employers” by the Human Rights Campaign and have consistently received a 100 percent rating on the organization’s Corporate Equality Index, a measure of workplace equality.   Human Rights Campaign called on Target and Best Buy to make similar campaign contributions in support of candidates who support gay marriage.

The Supreme Court’s January decision in Citizens United allows corporations, unions and other organizations to spend unlimited amounts to influence political campaigns, although they still can’t contribute directly to candidates or their organizations.

Recent filings by independent expenditure groups with the Federal Election Commission (FEC) suggest that aggressive fundraising is likely on behalf of candidates for both parties – and on behalf of particular interests.

The Los Angeles Times reported that Democratic leaders on Capitol Hill believe that more than $300 million has been budgeted by business and conservative groups for a campaign to wrest control of Congress from Democrats.

Commonsense Ten, an independent expenditure organization being organized by Democrats, reportedly has a budget in the millions. “"With our majorities in both houses in play -- and with them President Obama's agenda -- and talk of a hundred million dollars plus being raised by Republican independent groups, we're optimistic that our funding base will rally," one of its organizers told the Washington Post.

Another group just registered with the FEC is Californians for Fiscally Responsible Leadership, a fundraising organization reportedly backed by Native American Indian tribes which represent prominent California gambling interests.

Several major coal companies are reportedly exploring plans to form to create a non-profit organization to pool their money to defeat Democratic Congressional candidates they consider “anti-coal.”   One member of the group is said to be Massey Energy, owner of the Upper Big Branch mine in West Virginia where 29 miners died in an accident in April.

The Lexington Herald Leader reported that a senior vice president of International Coal Group recently sent a letter to other coal companies.  “A number of coal industry representatives recently have been considering a 527 (non-profit) entity with the purpose of attempting to defeat anti-coal incumbents in select races, as well as elect pro-coal candidates running for certain open seats,” the letter said. “We’re requesting your consideration as to whether your company would be willing to meet to discuss a significant commitment to such an effort.”

This article has been updated from the original published version to include comments from Target and Best Buy.

Photo of Target Store by Jay Reed via Wikimedia Commons

Senate Democrats officially launched their long-expected legislative response to the Supreme Court’s January ruling freeing up corporations, unions and other groups to make political contributions.

Sen. Charles Schumer and Rep. Chris Van Hollen (File Photo)

The 5-4 Citizens United decision had prompted a variety of proposals to blunt or cancel its effect.

Today (April 29) five U.S. Senators officially released their version of the DISCLOSE Act – an acronym for  the “Democracy is Strengthened by Casting Light on Spending in Elections” Act.

The sponsors said their goal is to pass the new measure by July 4 “so the law can take effect in time for the 2010 midterm elections.”

Sen. Charles Schumer (D-NY) declared “If we don’t act quickly to confront this ruling, we will have let the Supreme Court predetermine the outcome of next November’s elections. It won’t be Republicans or Democrats; it will be Corporate America and other special interests.”

The proposal would bar foreign-controlled corporations, government contractors and companies that have received government assistance from making political expenditures – and also require corporations, unions, and other organizations that make political expenditures to disclose their donors and stand by their ads.

“If the Supreme Court wants to treat corporations as individuals then we will hold those entities to the same standards of accountability that we do individuals, which means requiring that CEO's, labor leaders and even political consultants stand by their ads," declared Sen. Ron Wyden (D-Or).

Other sponsors include Sens. Russ Feingold (D-WI), Evan Bayh (D-IN), and Al Franken (D-MN).

An announcement from the Senate sponsors said:

“Under the Senators’ proposal, the heads of any organization sponsoring an ad—including corporate CEOs—would be required to appear during the ad, as is currently required of candidates for federal office. In cases where special interests funnel their money into shell groups, the top five organizations that have donated to the group would have to be identified on screen during any ad sponsored by that group. The CEO of the group’s top funder for that particular advertisement would also be required to appear on screen to deliver a “stand by your ad” disclaimer.”

They said the measure would also require corporations and advocacy groups that make political expenditures to “establish easy-to-track campaign accounts,” including having all donations exceeding $1,000 and all expenditures to be reported within 24 hours to the Federal Election Commission, on public websites, and to shareholders in corporate filing statements.

House Version

A similar measure was introduced in the House by two Democrats – Rep. Chris Van Hollen (D.-Md) and Rep. Robert Brady, (D.-Pa) and two Republicans -- Rep. Walter Jones (R-NC) and Rep. Mike Castle (R-De.)

“Every citizen has a right to know who is spending money to influence elections, and our legislation will allow voters to follow the money and make informed decisions,” Rep. Van Hollen said.

Rep. Jones said: “I don’t know many people in Eastern North Carolina who believe that transparency is a bad idea, or that Chinese or Russian-flagged companies should be able to spend unlimited amounts to influence U.S. elections, or that Wall Street banks should be allowed to spend their bailout money on campaign ads.  This bill would address those issues.”

It would prohibit bailout beneficiaries from making campaign-related expenditures, although the restrictions would be lifted once the money is repaid.

The Senate proposal would extend existing prohibitions on contributions and expenditures by foreign nationals to include domestic corporations,

1.      If a foreign national owns 20% or more of voting shares in the corporation, which is modeled after the control test in many states, including Delaware;

2.      If a majority of the board of directors are foreign nationals;

3.      If one or more foreign nationals have the power to direct, dictate, or control the decision-making of the U.S. subsidiary; or

4.      If one or more foreign nationals have the power to direct, dictate, or control the activities with respect to federal, state or local elections

President Obama on several occasions has called for steps to roll-back the Citizens United decision.

Chamber Speaks Out

Supporters of the decision promptly criticized the proposals.

Thomas J. Donohue, president of the U.S. Chamber of Commerce, called the measure “nothing more than a brazen attempt to tilt the playing field in favor of the incumbent party in this fall's elections, silence constitutionally protected speech, and abridge First Amendment rights.” And Theodore Olson, U.S. Chamber Counsel, said “the plain intent of the Schumer and Van Hollen legislation—the purpose invoked by its sponsors—is to discourage people from exercising their constitutional right to free speech. One can understand why today's party leaders may want to silence discussions on their continued fitness for office, but the First Amendment simply does not tolerate it."

Political website Politico.com quoted various union groups as being disappointed that the measures didn’t provide more language giving shareholders a say over political expenditures.

James Hyatt, a retired reporter and editor for The Wall Street Journal, has been writing about business ethics and social responsibility issues since 2005.

Last Jan. 21, the U.S. Supreme Court set off a political earthquake, ruling in the case of Citizens United v Federal Election Commission that corporations, labor unions and other groups are free to spend money seeking to influence political campaigns, although they still can’t contribute directly to candidates or their organization.

The ruling “may make the hundreds of millions spent in past presidential and congressional elections look like a pittance,” declared veteran Supreme Court watcher Lyle Denniston at SCOTUSblog.

The tsunami from that decision continues to spread. While the full ramifications haven’t yet been measured, aftershocks are already shaking the political ground.

Even before corporations and other groups start writing checks to exercise their new-found freedom, the Citizens United case appears likely to emerge as a key litmus test in the process of selecting a successor to Justice John Paul Stevens, who has announced his plan to retire after the current Supreme Court term.

Well before the Stevens announcement, President Obama fired his zinger in the State of the Union address, declaring as the Court sat in the audience, that the Court had “reversed a century of law that I believe will open the floodgates for special interests – including foreign corporations – to spend without limits in our elections.  I don’t think American elections should be bankrolled by America’s most powerful interests, or worse, by foreign entities.”

The remark appeared to prompt Justice Samuel Alito to mouth “Not true” and the commentariat launched its own debate as to the propriety of the remarks and speculation as to whether the Court should show up for Presidential speeches at all in the future.

Chief Justice John Roberts stepped it up a notch later in remarks to the University of Alabama School of Law, declaring “to the extent the State of the Union has degenerated into a political pep rally, I’m not sure why we are there.”

Thus ended round one. But there are many rounds to come.

Setback or Victory?

Initial reactions to the decision literally ranged from pronouncements about “the end of politics as we know it” to declarations that the ruling was a “rousing victory for free speech.” Advocates on both sides promptly followed up with plans to reverse or temper the decision or to widen it even further.

In mid-April White House senior adviser David Axelrod called the decision a case the president might keep in mind as he chooses a nominee to replace Justice Stevens. "He understands that the justice he appoints will be a pivotal voice on this court on issues like, for example, the one we just saw, Citizens United, where the court ruled that corporations have the same first amendment rights as individuals and they basically sanctioned a corporate takeover of our elections," Mr. Axelrod told MSNBC.

Virginia Thomas, wife of Justice Clarence Thomas, added to the commotion when she helped launch and became president and CEO of LibertyCentral.org, which calls itself “a major online resource for informing, motivating and activating everyday citizens around core founding principles of the US Constitution.” The group plans to work with the Tea Party Patriots organization.

There’s no dearth of opinion about the Citizens United case. The Court “treated political speech by commercial enterprises as though it was political speech from people,” Nell Minow, shareholder activist and editor of The Corporate Library, told a House committee. “If our goal is to preserve the marketplace of ideas, we must make sure it is not tainted by that other marketplace, the marketplace of money.”

She said corporations should report their political spending, calling for “clear, accessible, comprehensive disclosure without loopholes and we need every member of the board to sign their names to show that they have been fully informed and have approved the expenditures.”

Ralph Nader labeled the Court ruling a “corporatist, anti-voter decision…so extreme that it should galvanize a grassroots effort to enact a Constitutional Amendment to once and for all end corporate personhood and curtail the corrosive impact of big money on politics.”

While much commentary about the ruling has been critical, there are supporters, and even a Facebook page entitled “Fans of Justice Kennedy’s Citizens United Opinion!”

Ira Glasser, former executive director of the ACLU, wrote at Huffington Post that critics “have failed to appreciate what a great ruling it was for the First Amendment, and what a huge victory it was for freedom of speech and against government censorship.” He said liberals and Democrats should shift their attention to providing public financing that will enable more speech instead of restricting it.

Related litigation is already underway.  In late March, the D.C. Circuit court of appeals struck down federal campaign finance laws restricting independent political expenditures by groups.

Proposals for Change

Opposition to the Citizens United ruling takes many different forms, ranging from proposals for new laws and new regulations, to Constitutional amendments, all intended to change or reverse parts or all of the decision.

Sen. Al Franken of Minnesota has introduced the “American Elections Act of 2010” intended to “keep foreign interests out of our elections” by banning election contributions and spending by corporations that are controlled or highly influenced by foreign nationals, and by requiring corporations to “disclose in their political advertising how much of their company is controlled by foreign nationals.”

The Congressional Research Service has suggested that Congress has two broad choices: provide candidates or parties with additional access to funds to combat corporate spending; or restrict spending or require additional spending disclosures. A March report tallied nearly 40 bills introduced that involve the Citizens United decision, with more expected.

Major policy questions, the CRS noted, include whether and how corporate and labor groups should be restricted in making independent political expenditures, whether spending by subsidiaries of foreign corporations should receive different treatment, and what information about political spending should be required.

Several proposals have been introduced in this Congress to amend the Constitution to permit Congress to further regulate campaign finance.

Rep. Alan Grayson (D-Fla.) takes a different approach. His “Business Should Mind Its Own Business Act” would levy a 500% tax on corporate political contributions.

Remember those “I approve this message” acknowledgments in political ads? Rep. David Price (D-NC) and Rep. Mike Castle (R-Del) propose to extend that requirement to corporations, unions and associations using political ads. They call it the “Stand by Every Ad” Act.

Karl J. Sandstrom, a former Federal Election Commission vice-chairman and counsel to the Center for Political Accountability, told one recent Congressional hearing “the amount of corporate money now available simply dwarfs what was previously available to corporations.” He said, “We do not know how corporations will use their new rights. Most troubling, however, is that under present federal statutory law, we will not be able to find out.”

Sandstrom labeled current disclosure requirements “woefully inadequate” and called on Congress to mandate disclosure of contributions made to third parties for political purposes; to require shareholder or at least director approval for significant corporate political spending; and to require institutional shareholders, as fiduciaries, to vote for or against such proposed spending.

Socially-involved institutional investors are also weighing into the debate, urging companies to take steps to disclose political involvement even without federal regulation.  The Council of Institutional Investors argues that as a result of Citizens United political organizations are likely to increase pressure on companies to ramp up their spending in the political marketplace. “The danger for shareowners is that the money could be used to underwrite candidates, issues and activities that are contrary to the values and policies of the company,” the Council says. “That could tarnish the company’s reputation and, ultimately, its share value.”

More to Come

Some commentators note that the decision appears to have opened up political activity well beyond the corporate sphere.

Laura Otten, director of the Nonprofit Center at La Salle University, says if corporations may now plunge into politics “shouldn’t nonprofit organizations be able to use their unrestricted dollars to do the same?” and does the ruling “open wide the door to challenge the IRS’ ban on campaign activities by 501(c)(3) organizations. It would certainly seem so, and I doubt there will be a dearth of organizations willing to mount that challenge!”

And the Texas Right to Life organization says the Citizens United decision “allows Texas Right to Life and similar groups to speak out more in favor candidates who share our views…”

At the moment, Democrats led by Sen. Charles Schumer of New York and Rep. Chris Van Hollen of Maryland are focusing on requiring disclosure of political expenditures by corporations, including personal acknowledgment of the major sponsor.

James Hyatt, a retired reporter and editor for The Wall Street Journal, has been writing about business ethics and social responsibility issues since 2005.

The Center for Political Accountability, the Council of Institutional Investors and a number of shareholder advocacy groups have launched a letter-writing campaign urging companies in  the Standard & Poor’s 500 Index  to disclose all political contributions they make with corporate funds.

Currently, 73 S&P 500 companies, including Hewlett-Packard, Merck, United Technologies, eBay, Aetna and Microsoft, make such disclosures, they said.

The letter campaign was prompted by the  U.S. Supreme Court’s Jan. 21 ruling in Citizens United v. Federal Election Commission,  which now permits corporations, labor unions and other groups to make independent contributions during political campaigns.

Reaction to the decision has reached multi-decibel levels with supporters praising its free speech position and opponents predicting massive corporate efforts to influence political campaigns.

The letter to S&P Index companies declares that the ruling “is likely to put companies under immense pressure to use shareholder funds to support candidates, groups and causes whose positions and activities could threaten a company’s reputation, bottom line and shareholder value.”

Disclosure will help companies “protect themselves from the pressure to give and from ill-considered political spending,” said Bruce Freed, President of the Center for Political Accountability.

Ann Yerger, executive director of the Council of Institutional Investors, which promotes good corporate governance, said “investors need to know how their money is being spent in the political arena. And boards need to step up to the plate and ensure that political checks the company writes enhance, not erode, shareholder value.”

The Council called on corporate boards to “monitor, assess and approve all company political contributions, and to develop and disclose publicly, on an annual basis, the amounts and recipients of all monetary and non-monetary contributions.”