Defending Citizens United?
My thanks to Danielle and her co-bloggers for inviting me to share some of my thoughts. This is my first foray into blogging, and I’m thrilled to join you for awhile. I’d like to start by discussing a current project, which examines the internal governance of corporate political activity. Comments, suggestions and critiques are most welcome.
Corporate political activity has long been an exceptionally contentious matter of public policy. It also raises a hard and important question of corporate law: assuming corporations can and will engage in political activity, who decides when they will speak and what they will say? In several cases, the Supreme Court has provided a relatively clear, albeit under-developed, answer: “[u]ltimately, shareholders may decide, through the procedures of corporate democracy, whether their corporation should engage in debate on public issues.” (First Nat’l Bank of Boston v. Bellotti, cited with approval in Citizens United v. FEC).
This corporate law aspect of the decision has attracted substantial criticism alongside widespread calls for major reforms to corporate and securities laws. Some argue that the Supreme Court misunderstands the reality of modern corporate law, insofar as shareholders have little practical ability to constrain managerial conduct. Others question why political decisions should be made by either shareholders or managers, rather than some broader group of corporate stakeholders. A third group claims that political activity is just another corporate decision protected by the business judgment rule. Thus, empowering shareholders in this regard would improperly encroach on the board’s plenary decision-making authority.
Yet, despite these concerns, there may be pragmatic and normative merit to the Supreme Court’s approach. In a current paper – “Democratizing Corporate Political Activity” – I present a case for shareholder regulation of corporate political activity through their power to enact bylaws. I’ll describe the argument in more detail in subsequent posts, but, briefly, I present three normative justifications for this governance structure. First, it may mitigate the unusual and potentially substantial agency costs arising from manager-directed corporate political activity. Second, it may increase social welfare by: (i) reducing deadweight losses and transaction costs associated with rent-seeking; and (ii) making corporations less vulnerable to political extortion. Third, if corporate speech can shape our society’s distributional rules, corporate law should not interpose an additional representative filter in the democratic process. That is, we should not assume that investors – merely by purchasing stock in a public company, often through an intermediary such as a mutual fund – grant managers the unilateral authority to engage in political activity on their behalf.
With that said, I should be clear upfront that there are important challenges and objections to each of these arguments. I will describe the main concerns as I proceed.
The next post will lay out the Supreme Court’s vision of corporate political activity, and explain why the shareholder bylaw power best fits the Court’s description of shareholder democracy in this context.