A recent decision issued by the US Supreme Court expanded the freedom of corporations to spend money on political campaigns and candidates — a freedom enjoyed by corporations in other countries around the world. This raises well-known questions about democracy and private power, but another important question is often overlooked: Who should decide for a publicly traded corporation whether to spend funds on politics, how much, and to what ends?
Under traditional corporate-law rules, the political-speech decisions of public companies are subject to the same rules as ordinary business decisions. Consequently, such decisions can be made without input from ordinary shareholders or independent directors, and without detailed disclosure — all safeguards that corporate law establishes for other managerial decisions, such as those concerning executive compensation or related-party transactions.
In a recent article, however, Robert Jackson and I argued that political-speech decisions are fundamentally different from ordinary business decisions. The interests of directors, executives and dominant shareholders with respect to such decisions may often diverge significantly from those of public investors.
Consider a public corporation whose chief executive officer or controlling shareholder supports a political movement to the country’s right or left and wishes to support it with corporate funds. There is little reason to expect the political preferences of corporate insiders to mirror those of the public investors funding the company. Furthermore, when such divergence of interest exists, using the corporation’s funds to support political causes that the corporation’s public investors do not favor — or even oppose — may well impose on them costs that exceed the monetary amounts spent.
To prevent this, lawmakers should adopt safeguards for political spending decisions that would limit the divergence of such decisions from shareholder interests. For starters, it is important to require traded companies to provide detailed disclosure to public investors about the amounts and beneficiaries of any funds that the company spends, either directly or indirectly.
In expanding corporations’ rights to spend money on politics, the US Supreme Court relied on “the processes of corporate democracy” to ensure that such spending does not deviate from shareholder interests. Clearly, however, such processes can have little effect if political spending is not transparent to public investors.
For such disclosure to be effective, it must include robust rules with respect to political spending via intermediaries. In the US, for example, organizations that seek to speak for the business sector, or for specific industries, raise funds from corporations and spend more than US$1 billion annually on efforts to influence politics and policymaking. While the targets of these organizations’ spending are disclosed, there is no public disclosure that enables investors in any public corporation to know whether their corporation contributes to such organizations and how much. Investors deserve to know.
Moreover, a public company’s political spending decisions should not be solely the province of management, as they often are. Independent directors should have an important oversight role, as they do on other sensitive issues that may involve a divergence of interest between insiders and public investors. And these directors should provide an annual report explaining their choices during the preceding year.