Politics: Another Way To Waste Shareholder Money

I don’t often go to academic conferences. My general opinion is that at their best, sitting in a windowless room all day listening to people talk about their papers is mildly boring—even when the papers themselves are good. And it takes a lot to justify my spending a night away from my family.

Despite that, a little over a year ago I attended a conference at George Washington University on The Political Economy of Financial Regulation. I went partly because my school’s Insurance Law Center was one of the organizers, partly because there was a star-studded lineup (Staney Sporkin, Frank Partnoy, Michael Barr, Anat Admati, Robert Jenkins, Robert Frank, Joe Stiglitz (who ended up not showing), James Cox, and others, not to mention Simon), and partly because I have friends in family in DC whom I could see. It was one of the best conferences I’ve been to, both for the quality of the ideas and the relatively non-soporific nature of the proceedings.

Many of the papers and presentations from the conference are now available in an issue of the North Carolina Banking Institute Journal (not yet on their website), which should be of interest to financial regulation junkies. My own modest contribution was a paper on the issue of corporate political activity. (In a moment of unwarranted self-confidence, I told one of the organizers I could be on any of three different panels, and they put me on the panel on “political accountability, campaign finance, and regulatory reform.”)

In the wake of Citizens United (and, more to the point, SpeechNow.org), there is plenty of discussion of how campaign finance law might be changed to limit political participation by corporations. My paper takes another approach, asking whether existing corporate law already places limits on the ability of a corporation’s directors and managers to dedicate corporate resources (which, according to the commonly accepted doctrine, belong in some sense to shareholders) to political purposes. (This question was raised by John Coates, among others, who has studied whether corporations can claim to be getting economic benefits for their political contributions.) Courts so far have not placed many limits on the ability of corporations to contribute to super PACs, 501(c)(6) organizations like the Chamber of Commerce, 501(c)(4) “social welfare” organizations like Karl Rove’s Crossroads GPS or President Obama’s Priorities USA (both of which have affiliated super PACs), or 501(c)(3) charitable organizations like the Congressional Sportsmen’s Foundation.

I argue in my paper that courts could, at least theoretically, scrutinize political contributions as potential violations of insiders’ duty of loyalty (to the corporation and to shareholders). That is, if the CEO of a company makes a contribution in the expectation of some personal benefit (like lower individual income taxes), even if the contribution might also benefit the corporation, the courts should apply a higher standard of review.

The paper also winds its way into a discussion of corporate contributions to charities in general. Although such contributions are generally unquestioned, they rest (at least in some states) on a relatively thin and dodgy set of precedents. The line of cases begins with a Cold War case (A.P. Smith Manufacturing Co.) in which a corporate contribution to Princeton University was justified essentially as a way of protecting democracy from the communist threat. It culminates in Kahn v. Sullivan, in which the judge reluctantly signed off on a massive gift by Occidental Petroleum to build a monument to its CEO, Armand Hammer—in part because of the unusual posture of the case, in which one set of plaintiffs was contesting a settlement negotiated by a different plaintiff. The result is that today CEOs can give away (shareholder) money to “charities” (and take the attendant board seats and social status for themselves) without even having to claim that the contribution will provide a net benefit to the corporation.

At the end of the day, the importance of corporations in both realms—electoral politics and charitable giving—is probably overstated. Less than 5 percent of charitable contributions are made by contributions; all the blockbuster gifts you read about are by individuals or their private foundations. On the political side, it is a fact that super PACs were overwhelmingly financed by individuals; but because we don’t know who is contributing to (c)(4) and (c)(3) organizations, it’s possible that corporations are playing a significant role there. We just don’t know (which is one reason why we need greater disclosure of political spending, as argued by Lucian Bebchuk and others.) Regardless of the volume of corporate political spending relative to spending by Sheldon Adelson and his ilk, however, corporate insiders shouldn’t be allowed to waste shareholder moneyon their own pet political beliefs.