Shareholders Should Hear About Political Spending

On Sept. 9, about a month before the U.S. Supreme Court officially kicked off its 2009-2010 term, the justices assembled to rehear a closely watched case about corporate campaign spending. Citizens United v. Federal Election Commission involves a nonprofit group that wanted to use corporate funding to distribute a film harshly critical of Hillary Clinton shortly before the 2008 Presidential primaries.

The 2002 McCain-Feingold Act bars companies from spending their treasury funds on electioneering communications, a prohibition upheld by the court in 2003. Instead, companies must use corporate PACs, segregated funds that are raised—with restrictions—from top executives and others. Thus the FEC argued it was within its rights to bar Citizens United from distributing the anti-Clinton film so close to primary elections. (My employer, the Brennan Center for Justice, submitted a brief backing the FEC.)

But during September's oral argument, the court indicated it may look past the facts of this case and issue a broad ruling—perhaps citing companies' First Amendment rights— that would strike down this McCain-Feingold provision, as well as federal-style campaign finance laws in 22 states that also ban the use of corporate treasury funds to back or oppose candidates in elections. Indeed, the court appears poised to sweep away decades of laws limiting corporate campaign expenditures.

If that happens, U.S. securities laws should be rewritten to protect shareholder interests. For that matter, there's enough corporate treasury money making its way into politics under current law—mostly at the state level—to justify such legislation now.

Shareholders need to be protected because they don't necessarily profit from a corporation's political donations. Indeed, a recent study of more than 12,000 companies, led by University of Minnesota professors Rajesh Aggarwal, Felix Meschke, and Tracy Wang, found that corporate political expenditures were typically linked with lower shareholder value. The survey suggested that donations were based in part on managers' political preferences, not on what might benefit their businesses.

What might a shareholder protection law look like? It could be modeled on the British approach. A law passed in 2000 requires British companies to get shareholders' permission to make political expenditures and must report the spending in their annual reports.

Here's how it works: Corporations annually disclose every political expenditure of at least $3,000, naming the recipients. They must obtain prior shareholder approval, usually at the annual meeting, to spend more than $8,000 on political campaigns in the following year or so (no recipient names required). If the resolution fails, no dice. Any directors who make unapproved corporate donations are personally liable for the amount spent.

By contrast, U.S. shareholders typically don't know how much a company takes from its coffers to spend in elections. In the 28 states lacking federal-style election rules, businesses can donate directly from their treasuries. Such spending can hide in the gaps between campaign finance law and financial regulatory requirements. (The Securities & Exchange Commission doesn't require political contributions to be disclosed in annual reports.) And while most corporate spending on state elections technically must be reported to state regulators, the laws governing this requirement tend to be porous.

There's been some movement toward transparent and accountable corporate political giving, led mostly by the Center for Political Accountability. As of mid-October, at least 66 companies—45 of them in the Standard & Poor's (MHP) 100—had announced they will disclose their campaign spending. A good start, but given the thousands of publicly listed corporations in the U.S., not enough. Besides, disclosure is just one step. Shareholder approval is equally important. What good is it for investors to object, or disinvest, once the money is out the door?

A U.S. law based on the British model makes sense, even if the Citizens United case doesn't open the floodgates of corporate spending in elections. As the Supreme Court wrote in a 1948 opinion upholding Taft-Hartley rules barring certain political expenditures: "Corporate officials [have] no moral right to use corporate funds for contribution to political parties without the consent of the stockholders." Congress should ensure that they have no legal right, either.

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