The Supreme Court’s Theory of Corporate Political Activity

In an earlier post, I outlined an argument that – despite having attracted a fair amount of criticism – the Supreme Court’s vision of corporate political activity may have substantial normative merit from a corporate governance perspective.  In this post, I’ll describe that vision in two related parts.  First, whose expressive rights are being vindicated when corporations engage in political activity?  And second, what internal governance structures should regulate how and when corporations speak?

The first question raises a tricky issue at the intersection of constitutional law and corporate theory.  Corporations are legal fictions, albeit exceedingly useful ones.  They are not self-aware, they have no conscience, and they cannot act or speak except through human beings. Yet, the law has long treated corporations as legal “persons” for most purposes, including eligibility for many (though not all) constitutional protections. This treatment poses a metaphysical question: just what sort of “person” is a corporation?  To answer this question, the Supreme Court has historically relied on several theories of the corporation: the grant (or concession) theory, the aggregation theory, and the real entity theory.  Briefly, the grant theory views the corporation as purely a creature of the state, having only the rights and protections provided by statute, and thus broadly vulnerable to government regulation. The aggregation theory looks past the corporate form to the individual members or shareholders exercising their freedom of associating for some legitimate business, and concludes that corporations must thus have whatever powers and privileges necessary to vindicate the rights of those underlying constituents. The real entity theory posits that corporations exist independently of their constituents or the statutes authorizing them, and are thus a distinct entity entitled to all (or at least most) of the rights of natural persons. The Supreme Court’s corporate jurisprudence has, infamously, cycled repeatedly and inconsistently through each of these theories, often employing multiple theories in the same case.

In contrast to this general indecisiveness, though, the Court’s corporate political speech cases fairly clearly adopt a version of the aggregate view.  I treat the language from the cases in more detail in this paper, but the core idea – which flows from the early cases concerning corporations’ right to lobby, through Bellotti and more recently Citizens United – is that First Amendment speech rights inure to human beings.  Thus, when corporations speak they do so on behalf of the human constituents acting collectively through the corporate form.  As Justice Scalia explains in his Citizens United concurrence: “[t]he authorized spokesman of a corporation is a human being, who speaks on behalf of the human beings who have formed that association.”

As to the second question, the Court gives a firm but vague response: shareholders, acting through the procedures of corporate democracy, decide whether and how their corporations should engage in public debate.  Yet, it’s not exactly clear what the Court means by “corporate democracy.”  As a matter of corporate law, that concept is not self-defining; the proper allocation of decision-making power between managers and shareholders is one of the central, unresolved debates in modern corporate law.  One can, however, glean three key principles from the Court’s decisions.  First, the decision-making process is necessarily majoritarian. Some shareholders may dissent from the decision, but their remedy (if any) lays elsewhere.  Second, the process must actually vindicate shareholders’ concerns.  The Court concluded that shareholders need no legal protections external to corporate law because any “abuse[s]” – referring to managerial decisions that do not accord with the majority’s desires – can be “corrected by shareholders” through this process.  Finally, the Court seems to contemplate something broader than merely the representative democracy of electing the board.  As Justice Powell notes in Bellotti, shareholders should be able to privately order their preferences as to corporate political activity by “insist[ing] on protective provisions” in the corporation’s constitutional documents, which would bind managerial authority ex ante.

Some claim that the combination of these criteria simply illustrates the Court’s misunderstanding of modern corporate law.  Shareholder control rights within public firms are largely illusory.  Even a majority of shareholders cannot insist on corporate action outside of certain limited circumstances, and the directorial election process usually leaves much to be desired in terms of disciplining management.

I argue, though, that there is a ready-made governance structure that conforms with this framework: allow shareholders to enact intra-corporate bylaws regulating corporate political activity, which (in most jurisdictions) they can do unilaterally by majority vote.  In the next post, I’ll explain the mechanics of this approach, describe potential limitations arising from current jurisprudence concerning the scope of the shareholder bylaw power, and discuss pragmatic benefits to this form of private ordering.

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5 Responses

  1. A.J. Sutter says:

    My apologies, this post bears more thought than something quick dashed off when one is heading for the door, but: clearly the sense in which “the decision-making process is necessarily majoritarian” is not a politically democratic one. The majority you refer to is a vote by holders of a majority of shares, not a majority of the holders.

    Moreover, as Aristotle wisely observes in Book IV of the Politics, it isn’t democracy when the majority involved is one of wealthy people. Unless the population of shareholders of a company has roughly the same income distribution as the electorate at large, even votes based on a majority of shareholders would still be biased in favor of wealth. The appeal of “one person, one vote” and “freedom of speech” to the electorate at large is that they seems to wipe out these differences. I don’t see how intra-corporate bylaws are going to change the intuitive feeling of many people that corporate speech puts them at a severe disadvantage in political participation. Nor would such a measure convince me that such an intuition is wrong.

    Granted, you do qualify your post by saying that the Court’s jurisprudence has substantive merit “from a corporate governance perspective.” But in the big picture, it’s not clear that this is the appropriate perspective to adopt.

  2. Brett Bellmore says:

    I think it’s got to be remembered that a (the?) major target of the effort to restrict corporate speech has been non-profit corporations, such as the NRA. Corporate governance is a rather different thing for membership organizations such as the NRA, with boards elected without weighting of “shares”, and whose very existence involves advancing a viewpoint.

    It has long seemed to me that the justification of corporate censorship focuses exclusively on for profits, while the actual target of the censorship lies elsewhere. As such, it’s something of a bait and switch.

  3. Jay Kesten says:

    Thanks for the comments.

    A.J., perhaps I should have been more explicit on this point, but I’m not taking a position on the underlying merits of Citizens United or on the first-best approach to campaign finance/corporate engagement in the political process. Rather, given that corporations have a relatively unfettered right to engage in political activity (at least for now), I think it’s independently worthwhile to consider the merits of various allocations of decision-making power as to those activities. My claim is relatively narrow: that empowering shareholders in this limited context is more desirable than leaving these decision exclusively to management.

    That said, you’re quite right to note that “corporate democracy” shouldn’t be conflated with political democracy. I’m not suggesting that shareholders inside any given public company accurately represent the views of the electorate writ large, but I think it’s plausible that empowering shareholders is more democratic than leaving these decisions exclusively to management. I’ll come back to this argument, and there are certainly some important caveats and objections, so I’m quite interested in your further thoughts.

    Brett, I think we both agree that the internal governance of non-profits differs meaningfully from that of for-profit corporations. I’m looking exclusively at the latter, in the context of deciding when and how those corporations engage in the political process. In that light, I don’t see how my claim relates to censoring corporations, aside from the notion that shareholders could restrict their own companies’ political engagement if they saw fit to do so.

  4. Brett Bellmore says:

    I can see that you’re focusing on for profits. But if all real world legislation pointedly refuses to implement such a distinction, (As McCain/Feingold did, despite non-profits making a lot of noise about it.) isn’t this really just aiding people intent on talking about ADM, and censoring NRA, in committing their bait and switch?

  5. Jay Kesten says:

    I don’t think I’m facilitating a bait and switch at all.

    Citizens United opened the door for relatively unfettered entity (here, I’m using the term loosely to describe for-profits, non-profits, unions, etc…) participation in the political process. Accordingly, there must be legal rules governing the internal decision-making process concerning when those entities speak and what they should say. Should the decisions be made by management? Shareholders? Other corporate stakeholders, such as employees? Some combination of the above? Are mandatory rules preferable to firm-specific, privately ordered arrangements? The choice isn’t obvious, and is – I think – worthy of attention. In the for-profit context, and especially for public corporations, there is legitimately a lot at stake. Are you suggesting that we shouldn’t have that discussion?

    In any event, I just don’t see the connection between the outcome of that debate and censoring the NRA. My claim isn’t about campaign finance laws at all. It’s about state corporate law and the federal securities laws, which do indeed draw distinctions between different types of corporate entities. The core First Amendment question is a separate issue.