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Reexamining Corporate Governance after Citizens United

Anthony Kammer

Earlier today, Demos, along with a broad coalition of organizations, asset management groups, and elected officials sent a letter to the Senate Banking Committee calling for a public hearing to consider corporate governance solutions to Citizens United. While large numbers of democracy advocates continue working to overturn Citizens United and restore meaningful campaign finance restrictions, there are a number of important battles happening on the corporate law front as well that could significantly increase transparency and restore accountability over corporate political spending.

Corporate governance has been underutilized as an arena to empower the broader public against the unrestricted flow of corporate money in our democracy. Senator Menendez, for instance, recently reintroduced the Shareholder Protection Act, which would require full disclosure of any political spending by publicly-owned corporations and further require shareholder authorization of corporate political spending. Similar shareholder protection laws have been proposed in California, Massachusetts, and New York. And a petition was filed with the SEC in 2011 (File No. 4-637) requesting a rule to require public companies to disclose their political spending to shareholders. As today’s letter to the Senate Banking Committee observed:

“[c]orporate disclosure and the raised voices of shareholders can help provide a framework to rein in some of the damage to our democracy in this troubling new political landscape.”

Beyond the well-documented distortive and corrupting effects that corporate spending has in the electoral and legislative arenas, there are also several compelling economic reasons that corporate political spending should be made more open and responsive to investors.

First, the influence and access of corporate lobbyists means that corporations or affiliated groups often draft the laws and regulations that most affect them. Rent-seeking of this form undermines competitiveness and makes the market less accessible to new entrants. As the American Independent Business Alliance (AMIBA)’s amicus brief in Citizens United noted, “large corporations have converted their economic power into political favors that extract subsidies from taxpayers, stifle enforcement of anti-trust laws…and other rules that disadvantage small business.”

Second, corporate political activity also has the potential to alienate investors and consumers in ways that are bad for business. In 2011, for example, Target donated $150,000 to an anti-gay-rights Minnesota gubernatorial candidate. Their political spending sparked a massive public backlash that included calls for boycotts and ended with a shareholder resolution asking the company to rethink its policies on political donations. While this incident led to Target’s eventual adoption of policies requiring greater transparency, the potential for consumer and shareholder backlash makes political spending enormously risky, particularly in our increasingly polarized political environment.

Finally, a system where management is spending money that belongs to shareholders creates potential conflicts of interest that will affect people’s willingness to invest. Some investors will choose to avoid businesses whose political stances they find objectionable. But even more systemically, the interests of shareholders and managers do not always perfectly align, and shareholders have reasonable concerns when their money is going to support political activity. As the coalition noted in its letter:

In corporate governance, there are no rules or procedures established in the United States to ensure that shareholders – those who actually own the wealth of corporations – are informed of, or have the right to approve, decisions on spending their money on politics.

Beyond the agency problems, the lack of transparency and shareholder feedback has the potential to chill investment.

Corporate governance solutions to Citizens United need a more prominent place in our politics. Holding management accountable is important both for the strength of the larger democracy and to limit the disabling impact that self-dealing and rent-seeking are having on our economy.