CEOs, Politics, and Other People’s Money

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.

11 thoughts on “CEOs, Politics, and Other People’s Money

  1. Leahy makes a good start. However, some of the most troubling contributions are, as Kwak mentions at the top, 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.”

    How does intermediate scrutiny help unmask secret contributions? Second, many of the subject organizations focus on a whole raft of issues. The Chamber and ALEC may advance specific corporate interests and may potentially hinder others, especially reputation.

    We need to have many more robust conversations about these issues in a widening circle.

  2. Now if politics weren’t so lost, we wouldn’t have to work so hard to GET MONEY OUT OF POLITICS, period.

  3. This also raises the question as to whether corporations only have an obligation to their shareholders. If there is “precious little” that shareholders can do, there is just about squat that the rest of us can do.

  4. Lets examine the moral issue of this post a tad closer since we already know the legal one regarding the public has been severely compromised. Time after time it has been proved that CEO’s and boards of corporations work on behalf of themselves making money rather than on behalf of the investing consumer.
    The most recent example is the one of the sleepy public’s views on driver less cars, it’s now stated that control of the driver less car is 100% in the hands of the driver even though such trinkets as cell phones and tv’s are readily installed and used to distract the driver from being 100% in control.
    A recent fatal accident in a driver less car that occurred in early May, then there was a scheduled auction to raise money for this company on the 18th of May, on May 16th the company informed the gvt arm of this tragedy covering their legal obligations well in advance, yet did not inform the public who’s $1.4 billion of interests were also at stake to further the cause of the company. Naturally we can figure the amount would have fallen much shorter of the raised amount and that in turn would have lead to a reduction of the stock price rather than the current one. Once the money was raised, and some 5 or 6 weeks later the announcement was revealed by the gvt arm and not the company, the stock then took the hit to the investing public, along with a loss of confidence of the consumer.

    This was then brushed off as everyday business and within the normal statistical death rate for driving. Yet the dream of accident free driving remains alive, as do the insurance company’s who naturally stand to lose the day accident free driving arrives because, who needs insurance company’s when there is no chance of getting into an accident.

    Now we all know a driver less car can never avoid a deer in the headlights, so the dream can always stay alive along with the expense of insuring the driver less car.
    Bottom line here is that the corporations boards and CEO’s will always find a reason to act on behalf of themselves while justifying that their product benefits society at large, regardless of the facts and costs at hand, this is just more proof of that.

  5. It is interesting that even under this scrutiny the “shareholders” of democracy are considered and the common stock of market “stakeholders” are too diluted to merit any real consideration. The distortions are magnified from the bottom – up but the consideration is given only from the top down. An insidious “Supply Side” politic has taken hold of “rational” body politic in such a way as to blindside the abuses of power that permeate these select divisions at the demographic level and covertly invert these into market decisions (once again the inadvisable hand at large with a false transparency).
    the fact is that corporate money is legalized political corruption. It makes stakeholders pay through markets for what shareholders want to financially structure and support. Media follows the advertising money and politicians follow the revenue streams. When I purchase a dixiecup paper product I am not simply buying product but helping to pay Koch brothers political interests built into the market price. Most of these “contributions” are invisible. So the invisible hand becomes an invisible hand out.
    It took centuries and an entire Atlantic Ocean buffer to separate Church and State. One can only guess how long it will take before this corruption gets its full discretionary revolt.

  6. How MBA Programs Drive Inequality
    Posted on July 8, 2016 by Yves Smith
    By Lynn Parramore, senior research analyst at the Institute for New Economic Thinking.
    (Originally published at the Institute for New Economic Thinking website)
    “Over the last several decades, American business executives have made decisions that have exacerbated the inequality that chokes prosperity for the country. They have misallocated resources and they have awarded themselves mind-boggling compensation packages while workers have suffered stagnant wages and increasing job insecurity.”

  7. capitalism allocates resources through markets, whereas democracy allocates power through votes. Corporate money is not free speech, it is a “Free Market” capture of democracy itself.

  8. Precious things such as democracy are to be either cherished or controlled, there is no middle ground. Administrators for the most part have chosen control by majority voting rule as the needed solution to obtain their means to their ends. Once painted into a corner after misallocating resources they are now forced into choosing their original preferred method, which suits them just fine because what could be better than having to fall back on their original preferred methodology, it’s a win-win for administrators as no one goes home unhappy at the end of the day, no one in control of a situation anyway.

  9. Corporate law would be a fine thing if the laws corporations had to follow actually made any sense, they don’t. Lets simply look at bankruptcy’s to prove this. If an individual declares bankruptcy, his life is just about finished, he loses most everything and must start over if he doesn’t choose and succeed with the 3-5 year deferred payment option(and with today’s grading of your financial situation via credit scores, you can rest assured of another major set back, if nothing else this country is great at raising the cost of living and then holding you accountable financially). Corporations on the other hand lose a large percentage of common stakeholder share money along with a total equity liquidation loss, but the preferred “Donald Trumps” of the corporations live to freely invest for another day unscathed. In the Donalds case, his successes are counted in the millions, but his failures are counted in the billions, with his exceptions of his golden parachutes.

    The reasoning given to this formula is the supposed human advancement theory that the benefits of successes out weigh the consequences of failures, this might be true if society was not allowed to run deficits to monetize the failures,(think of our car industries), our collective memory is so short that the failures are quickly forgotten as the latest successes are touted as the new and exciting thing.
    To balance this equation the corporate bankruptcy’s should have been eliminated and a truth in design clause (backed up by hefty warranty legislation) would weed out the failures in due time. Oh, so you say progress would be set back back to the stone age, perhaps this not a bad thing when equating failure with corporate, private, and public debt. We are always quick to design a greater good when the last greater good quickly turns evil after not lasting the true test of time. And then forget the evil as negative thinking when dealing with people who have a strictly positive thinking point of view or no view at all. We always look to growth as the solution, and forget about the debt as the problem.

    A financial emancipation was needed in the eighties rather than legislation leading to an increase in the prime rate. Sure the energy hangover would have been difficult to handle, but not drinking more debt would have allowed the patient to recover from the debt hangover easier in the long run rather than create an angry middle and lower class debt monster that can no longer be managed without the governmental war monster. A class war which can never be won by either side, only fought, so let the fighting begin in earnest.
    Once a bad idea is sold to politicians as a good idea, only the ones making money from it benefit from it’s continued use, the remainder pay the price slowly and quietly over time without a peep of resistance, and should resistance flower, it is quickly extinguished as a problem to making money. Here is the perfect example, extended over millennials so as to not be confused with recent quickly forgotten bad ideas.
    Once again I reiterate, if most every citizen were to come down with an expensively treated disease, the country’s GDP would show very positive results, but the health of it’s citizens would continue to deteriorate, the end result being a problem of personal, corporate and public debt, at no time do we consider addressing the nearly 200 trillion dollar debt monster which sits on the current and future books here in the United States, we only juggle the tools of paying the interest and a small fraction of the principle as the solution to the debt monster. This has lead to today’s fight between a government, businesses, and it’s citizens. When the government is the greater fool, there are no other fools to turn to except it’s willing and unprepared citizens.

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