By James Kwak
I am, on paper, a corporate law professor, because—well, I guess because I used to work for a corporation (two, actually), and the books I write sometimes have corporations in them, and I teach business organizations as part of my day job. (Secret for those looking for a job as a law professor: UConn was looking for someone to teach corporate law, and I wanted the job, so that’s what I said I could do.) But I’ve made it this far writing exactly one corporate law paper (my summary here), and that was actually about corporate political activity—namely, whether and how shareholders can challenge political contributions that they think are not in the corporation’s interests.
It is well known by now that, in Citizens United, Justice Kennedy committed one of the true howlers of recent Supreme Court history:
With the advent of the Internet, prompt disclosure of expenditures can provide shareholders and citizens with the information needed to hold corporations and elected officials accountable for their positions and supporters. Shareholders can determine whether their corporation’s political speech advances the corporation’s interest in making profits, and citizens can see whether elected officials are “‘in the pocket’ of so-called moneyed interests.”
The obvious problem is that there is no disclosure of corporate contributions to 501(c)(4) social welfare organizations and 501(c)(6) associations (such as the Chamber of Commerce), and even contributions to 527 Super PACs can be easily laundered through intermediary entities whose owners are secret. The second, slightly less obvious problem is that, under existing standards, there is precious little that shareholders can do to “hold corporations accountable” for political donations. Given the traditional deference that courts show to decisions made by corporate directors and officers, the latter have pretty much free rein to do what they want with their shareholders’ money.
My paper argued that existing law could and should be interpreted to impose a higher standard on corporate political activity, making it easier for shareholders to challenge contributions motivated by the CEO’s personal interests rather than the interests of the corporation. Luckily, other people in the field do not have as short an attention span as I do. In an earlier paper (my quick summary here), Joseph Leahy argued that corporate political contributions can be challenged as acts in bad faith. (Note: “bad faith” is a term of art in corporate law, and no one is really sure what it means.) Now Leahy has a new paper (to be published next year), “Intermediate Scrutiny for Corporate Political Contributions,” which makes a more detailed case that corporations should have to specifically justify such contributions.
“Intermediate scrutiny,” in this context, is also a term of art known only by corporate law professors (and law students for those few hours before a final exam or before the bar exam). In this context, Leahy boils it down to this:
a court evaluating a corporate political contribution should ask whether (1) management had reasonable grounds to believe that the contribution would directly or indirectly advance specific corporate interests, rather than some general political viewpoint; and (2) whether the contribution was reasonable, both as a method of addressing the specific corporate interest and in its amount.
That’s not so much to ask, is it? Ordinarily we don’t force CEOs to answer these questions about every business decision because we want them to make those decisions without fear of second-guessing by litigious shareholders (or plaintiff’s attorneys). But we’re not talking about launching products or entering markets; we’re talking about political donations, which are especially susceptible, as Leahy discusses, to being made for pretextual reasons. And if political expenditures really are an important part of your business strategy—say you’re part of a regulated oligopoly, like a telecom carrier—then lobbying for or against specific pieces of legislation would be trivially easy to justify.
The key thing about a higher standard of review isn’t whether a corporation’s board will be able to meet it in some specific case. It’s that by increasing the threat of litigation from zero to even some small, positive number, it will deter CEOs from treating the shareholders’ money as their own. Today, as Leahy says, “If management can use the corporate treasury to fund its favored political candidates, and get away with it, why use its own money?” Introducing just a little bit of litigation risk should be enough to induce executives to be much more careful to spend money on politics only when they can make a plausible case that it is a good investment—just like they do when it comes to ordinary business decisions.
This isn’t a silver bullet in the fight for a more fair political system; I think we need campaign contribution vouchers, or a massive multiple-match system for small donations, and nonpartisan redistricting, and federal standards for access to the polls, and many other things. But restricting the ability of CEOs to spend other people’s money on their pet political causes is a step in the right direction.