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.

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2 Responses

  1. Brett Bellmore says:

    “A third group claims that political activity is just another corporate decision protected by the business judgment rule.”

    A forth group claims that, while all the discussion seems to focus laser-like on for profit corporations, the real target of efforts to stem political speech by corporations seem to be corporations like the NRA, not ADM, and it’s probably a mistake to talk about this as though for profit corporations were the real concern of lawmakers. Rather than finding a way to gag those pesky interest groups.

  2. Jay Kesten says:


    Thanks for the comment. There are certainly other potential criticisms of Citizens United (and the response thereto) than the ones listed in the post. In case I wasn’t fully clear on this point, I’m not taking a position on the merits of the underlying decision. I take it as given that corporations – both for-profit and otherwise – now have a relatively unfettered right to engage in political activity. Given that, some internal governance mechanism is required for determining what those corporations will say.

    My aim in this paper is to explore the normative merits of a specific decision-making process within for-profit entities, with a particular focus on public companies. There may well be interesting internal governance issues in the non-profit context, but I think they raise substantially different considerations.

    As to legislators’ intent, I hesitate to offer a comprehensive or monolithic account. I’m sure that some lawmakers are indeed concerned with non-profit interest groups. It is worth noting, though, that the debate on banning or regulating corporate contributions was often focused on the ‘other people’s money’ problem, which is much more prevalent in widely-held, for-profit entities. (Adam Winkler has a great historical account – Moreover, several of the major campaign finance laws were enacted in the wake of what Larry Ribstein described as “flagrant shakedowns” of for-profit corporations by political fund-raisers. These laws were supported, and lobbied for, by large for-profit entities such as Monsanto, GM, Ford, and Time-Warner. If one likes public choice explanations, one might argue that such laws reflect – at least in part – those companies’ desire to minimize the rent-seeking arms race and/or the risk of political extortion.

    That’s all a long way of saying that I think it’s quite important to think about the pros and cons of different internal governance structures in the context of for-profit companies’ corporate political activity. Keep the comments coming — I’ll try to make my case!