February 2, 2010

Corporations and Campaign Finance

As you probably know by now, the U.S. Supreme Court recently invalidated certain restrictions on corporations’ participation in campaign finance in Citizens United v. Federal Election Commission. Because I focus on corporate law, a colleague told me I should write an article about this, to which I replied, I did—ten years ago.

I argued there that the Court’s campaign-finance jurisprudence has consistently failed to consider a large business corporation as a complex hierarchical entity.  A decade later, the Court continues to treat a corporation as the equivalent of an individual human speaker under the First Amendment. The Court imagines a corporation as an organization that reflects the will of its constituent individuals.

Citizen United, like past opinions, states in don't-blink-or-you'll-miss-it  fashion that shareholders control corporate speech through “corporate democracy."  But the Court has never tried to describe how “corporate democracy” works.  In fact, while shareholders can cast votes in director elections, directors typically run unopposed and it is very difficult for shareholders to nominate alternate candidates. Moreover, directors do not run corporations-CEOs do, and they are appointed by directors, not elected by shareholders.  While shareholders can express discontent with corporate political spending by selling their shares, this is only a kind of after-the-fact punishment, not a method of participation in making political spending choices.

There are certainly some arguments to be made in favor of the petitioners in Citizens United, but “corporate democracy” is not one of them.

If you are interested in hearing more about this issue, Professor Chris Elmendorf and I will participate in a panel discussion on Citizens United in [CORRECTION] King Hall ROOM 2008 at noon on Tuesday, February 9.

Comments

2/8/2010 5:11:11 PM #

Aren't directors bound by fiduciary duties to maximize shareholder value? Thus any campaign contributions would have to be made with the purpose of maximizing shareholder value.

Saylor Bean |

2/8/2010 6:00:58 PM #

Aren't directors bound by fiduciary duties to maximize shareholder value?

Believe it or not, the answer is no.  This is a common misconception about corporate law.  No court or corporate code recognizes a shareholder cause of action for failure to maximize shareholder value.  That is, people say all the time that directors are supposed to maximize wealth, but that supposed "duty" is not legally enforceable.

In fact, pretty much the opposite is true. Under the "business judgment rule" (BJR, a judge-made rule recognized in all states), a shareholder has no cause of action for an allegedly poor business decision by directors (e.g., a decision that led to less-than-maximum profits). Under the BJR, courts defer to the discretion of directors w/r/t business decisions.  Courts have even deferred to charitable donations on the ground that  in the directors' business judgment, they might be good for profits by generating good PR.  See Kahn v. Sullivan, a Delaware Supreme Court case.  Note that the court did not find that the spending was good for profits; it deferred to directors on the issue.  The same deference has applied to contributions to a referendum campaign, and would probably apply to expenditures on candidates as well.

Thomas Joo |

2/9/2010 1:29:46 PM #

I would argue, perhaps controversially (maybe not), that our Congressional democracy in many ways mirrors what you have described in your blog post re. "corporate democracy." While in theory we have the ability to provide our input to senators and representatives before they vote on issues, discontent is typically expressed through the election process, in effect "retaliating" for what we perceive as bad decision making or lack of fidelity to constituent interests. In fact, I believe in some ways, the interests of shareholders and the board (profit motive) are often much more in line than the interests of a given representative and his/her congressional district. Viewed in this light, corporate democracy is almost more democratic -- especially assuming that in practice, a corporation is unlikely to fund potentially very costly endorsements in pursuit of a political campaign or cause unless it is likely to return some sort of dividend, with the undertaking support for non-corporate-related interests, like love or hate for puppies, being a relatively unlikely and marginal risk for the shareholder.

If this view of Congressional/representative democracy holds water, does it grant some legitimacy to the corporate democracy argument? Or should it call us to question the fundamental underpinnings of our representative democracy altogether?

And thank you for your talk today!

Eddy Park |

2/9/2010 1:38:25 PM #

If this view of Congressional/representative democracy holds water, does it grant some legitimacy to the corporate democracy argument? Or should it call us to question the fundamental underpinnings of our representative democracy altogether?

Excellent point, and one that's bothered me for some time.  I tend toward the latter view...  

ThomasJ |

2/10/2010 11:25:26 AM #

Thanks for everyone who attended the discussion of Citizens' United at King Hall on February 9.  Special thanks to Liam McKenna for conceiving and organizing the event and Scott Tester for his help.

ThomasJ |

5/26/2011 12:00:31 PM #

We have had numerous lunchtime arguments at our office regarding this subject. I personally lean towards the same view as ThomasJ, but it is a great discussion nevertheless. I wish I could've been there for the Citizens' United discussion!

Seattle Personal Injury Lawyer |

5/25/2012 12:12:20 PM #

I know this post is over 2 years old now but still i felt compelled to chime in. Like the above comment stated this topic has been argued numerous times around the office but I do like the points that "Eddy Park" makes in his reply.  

Jackson White |