Corporate Political Spending Post-Citizens United
By Brian J. Robbins and Justin D. Rieger
As featured in Law360‘s Expert Analysis column on September 28, 2011.
As the 2012 presidential election heats up and the 2011 proxy season winds down, the 2010 decision of the U.S. Supreme Court in Citizens United v. Federal Election Commission has sparked renewed interest — and for good reason. 130 S. Ct. 876, 175 L.Ed 2d 753 (2010). The Citizens decision has potentially far-reaching implications for shareholders of publicly traded corporations and their ability to control, monitor or even have knowledge of corporate political spending decisions at the companies in which they have invested.
The underlying issue in Citizens was the constitutionality of Section 441b of the Bipartisan Campaign Reform Act of 2002 (the “McCain-Feingold Act”), which prohibited corporations and/or unions from using their general treasury funds to make “electioneering communications” in the 30 days prior to a primary election or the 60 days prior to a general election. 2 U.S.C. §441b. In holding that such restrictions violated the First Amendment rights of such entities, the Supreme Court overruled more than a decade of established law and gave publicly traded corporations the ability to make unlimited independent political expenditures. In other words, Citizens gave corporations the right to spend their general treasury funds for political purposes in the same manner, and to the same extent, as individuals.
Post-Citizens, shareholders — as owners of the companies in which they invest — are left with no real means of policing their company’s political spending activities in order to confirm that they are actually in the corporation’s best interests. They must essentially defer to the corporation’s directors and/or officers when it comes to spending the corporation’s general treasury funds on political activities. This is true despite the fact that the political objectives and interests being advanced by those directors and officers have the potential to diverge significantly from their own, and the company’s, best interests.
Shareholders’ Inability to Monitor or Control Corporate Political Expenditures
There is an important distinction between political expenditures of corporations and those of individuals. When an individual makes a political expenditure, he or she decides how much money to give and who it will benefit. However, directors and/or officers make such decisions on behalf of corporations and they do so without the awareness or approval of the shareholders whose interests they are required to protect. In other words, these shareholders currently have no insight into how, when or the amount in which the assets of the corporations they own are being used for political purposes.
Further, even if shareholders were able to discern how much a corporation spends on political activities, those spending decisions — and the directors and/or officers that make them — are protected from judicial scrutiny under the business judgment rule, which presumes that corporate directors have acted in good faith and in the best interests of the company when making routine business decisions. The only means by which a shareholder can overcome the business judgment rule is by showing that the directors violated their fiduciary duties of care and/or loyalty in making the contested corporate decision. This is not an easy thing to accomplish.
Suggested Means of Shareholder Action
As information concerning corporate political spending need not be provided to shareholders, and successful lawsuits concerning such expenditures pose significant challenges, the issue becomes: What can be done to ensure shareholders maintain visibility of, and hold influence over, the political spending activities of their portfolio companies? In order to prevent the potential disconnect between corporate political spending behavior and shareholders’ interests from materializing, some or all of the following needs to be accomplished.
Shareholder Pre-Approval of Political Expenditures
A 2010 report published by New York University School of Law’s Brennan Center for Justice suggests that the U.S. should adopt the U.K.’s approach to corporate political expenditures. Under the U.K.’s model, companies are required to provide detailed information to shareholders of any political donation exceeding the equivalent of $3,000, and shareholders are required to pre-approve any political spending from the companies’ general treasury. In addition, the company’s directors are personally liable to the company for the amount spent in violation of these rules and are required to pay interest on such amount at 8 percent annually.
This pre-approval process is usually done in the form of an annual (or longer) budget request by the corporation rather than holding a vote on every political donation or expenditure. While this is a somewhat drastic approach that would likely require modifying U.S. securities law, it is a noteworthy means of providing shareholders with control over the political spending of the companies in which they invest, and its successful implementation in the U.K. demonstrates its practicability. In fact, post-Citizens, many scholars have called for investors to seek approval and veto rights over corporate political expenditures in one form or another.
Corporate Resolutions Concerning “Permitted” Political Spending
Other forms of shareholder approval over corporate political expenditures may be easier to implement than the British model. One post-Citizens article written by Harvard Law School professor and renowned corporate governance expert Lucian A. Bebchuk and Columbia Law School professor Robert J. Jackson Jr. entitled “Corporate Political Speech: Who Decides?” proposes, in part, that shareholders be permitted to adopt resolutions specifically concerning the type of political spending that a corporation may engage in. 124 Harv. L. Rev. 83 (2010). For example, a resolution could be passed that prevents a corporation from spending general treasury funds on particular candidates for office and instead only allows expenditures to support certain issues, legislation or political parties.
While such resolutions would do little to alleviate all of shareholders’ concerns regarding corporate political spending, allowing the shareholders to define in advance the issues and areas where political spending would further the plight of the corporation and its shareholders (rather than the directors and officers authorizing the expenditures) is a step in the right direction.
Moreover, by delineating in advance the instances in which corporate treasury funds can be spent for political purposes, shareholders will have an easier time mounting legal challenges when those resolutions are not complied with. This is because corporate directors who make improper spending decisions will arguably not be afforded the protection of the business judgment rule.
Mandatory Disclosures
Few would question the appropriateness of requiring corporations to disclose to shareholders information concerning political spending activities when those decisions materially affect the public image and/or profitability of the company. Without such information, shareholders would be unable to determine the extent to which the company’s future growth prospects may be subject to sways in the political landscape. On the other hand, if corporate political expenditures have no anticipated bearing on the future of the corporation, a question may be raised concerning the appropriateness of utilizing the company’s resources for political purposes in the first place.
Accordingly, where corporate profits, goodwill or any other measure of corporate success are derived or expected to be derived in part from a company’s political spending activities, disclosure of the amount of such expenditures, the beneficial recipients thereof and the rationale behind those spending decisions are, at a minimum, warranted. This is the simplest means for shareholders to gain insight into the political spending policies of their portfolio companies.
The 2011 proxy season has seen numerous proxy proposals calling for corporations to publicly disclose information concerning their political spending activities. In fact, as of July 20, 2011, at least 25 of the U.S. Fortune 100 companies had shareholder proposals on their annual proxies seeking to require the company to disclose its political contributions, including 3M Co., Allstate Corp., Archer Daniels Midland Co., AT&T Inc., Boeing Co., Caterpillar Inc., Citigroup Inc., ConocoPhillips Co., CVS Caremark Corp., Express Scripts Inc., Exxon Mobil, Ford, Goldman Sachs, IBM, JPMorgan Chase & Co., Lowe’s, Northrop Grumman, PepsiCo Inc., Pfizer Inc., Prudential Financial Inc., Sears Holdings Corp., Sprint Nextel Corp., Valero Energy Corp. and Wal-Mart Group Inc.
Shareholders of Home Depot Inc. were even able to get a resolution included in the company’s 2011 proxy materials that would require the company to: (1) annually publish its political contribution policies and report on its spending for both the prior and upcoming year; (2) provide an analysis of how the spending complies with the company’s values and/or policies; and (3) give shareholders an annual advisory vote on the company’s policies and plans.
While none of these proposals were ultimately successful, the fact that proposed resolutions concerning corporate political spending are making their way into the annual proxies of well-known companies is a good indication that shareholders are taking note of Citizens and are trying to protect their interests in light thereof.
That said, if shareholder proxy proposals such as these continue to be voted down, the U.S. Securities and Exchange Commission may be well advised to take matters into their own hands and mandate such disclosures. In fact, on Aug. 3, 2011, a group of elite legal scholars urged the SEC to do just that. The coalition of law professors from Harvard Law School, Yale Law School and Columbia Law School sent a petition to the SEC requesting that it craft rules requiring the disclosure of corporate political spending activities to corporate shareholders.
Such SEC interference can likely be avoided, however, given that many corporations seem willing to ensure shareholders have insight and/or control over their political spending activities. In fact, The Center for Political Accountability — a corporate watchdog group that promotes more disclosure of corporate political contributions — has gotten at least 85 companies in the S&P 500 to sign on to their campaign for disclosure and oversight of corporate political spending, indicating that the rift between the interests of corporations and their shareholders might not be as likely to materialize as some have anticipated.
The Need to Align Shareholder Interests with Corporate Actions Post-Citizens
While serious concern has been raised regarding the potential for corporate political spending habits and shareholders’ interests to diverge from one another, the problem remains unresolved. It is only by aligning shareholder interests with the actions of corporate directors and officers that the potentially negative impacts of Citizens on shareholders’ ability to monitor or control corporate political spending can be avoided. Corporations and their representatives would also benefit by avoiding unnecessary, and potentially costly, litigation resulting from challenges to their political spending decisions.
Accordingly, as we look toward what will undoubtedly be a heated presidential election funded in large part by corporate donations, both shareholders and corporations should push for reform designed to neutralize the potentially negative impacts of Citizens on our corporate and political democratic process. Such reform could be accomplished by ensuring that: (1) corporations obtain shareholder approval before making political expenditures; (2) shareholders define in advance how and when corporate funds can be used in the political arena; and/or (3) corporations disclose material information concerning their political spending decisions and the rationale behind those decisions to their stakeholders.
The opinions expressed are those of the authors and do not necessarily reflect the views of the firm, its clients, or Portfolio Media, publisher of Law360. This article is for general information purposes and is not intended to be and should not be taken as legal advice. Law360 is a leading online resource for business lawyers and other legal professionals. All Content © 2003-2011, Portfolio Media, Inc.
* The firm name changed from Robbins Umeda LLP to Robbins LLP on January 1, 2013.
