Underwhelmed by shareholder regulation proposals

As the DISCLOSE Act siren song wails its last, let us not forget the other “reform” proposal made in the wake of Citizens United: shareholder democracy!

No less than the Harvard Law Review has released articles written about Citizens United v. Federal Election Commission, corporations, political speech and other related stuff. Eager to broaden my horizons, I took a look at the article by Lucian A. Bebchuck and Robert J. Jackson, Jr. Bebchuk is kind of a big deal corporate law professor at Harvard. Jackson is at Columbia, a graduate of Harvard Law, and apparently no relation to Robert H. Jackson. Overall, the authors argue that the law should impose special rules governing who gets to decide whether, and what, the corporation should say about politics. They prefer special rules to the default rule, which is that, as with ordinary business decisions, the directors and executives have authority to make political spending decisions.

I am underwhelmed. Not by the overall point, but by the lack of interest the authors demonstrate for the overlooked complexities that corporate governance brings to the issue of how corporations can or should speak in politics.

First, the world is full of varieties of corporations. There are little corporations, big corporations. Public corporations, private corporations. Churches and charities as corporations. Girl Scout troops. Blogs. You get the idea.

(Dr. Seuss, however, is a California Limited Partnership).

Although at first the authors appear to offer an analysis applicable to corporations as a class, they retreat from that, admitting that they are really only interested in large, publicly traded corporations. This makes their task quite a bit easier, but it also makes their article quite a bit less interesting. It seems to me, for instance, that there might be an argument that shareholders of private companies with illiquid shares have more at stake than shareholders holding shares that are easily sold—they can’t “exit” and can’t dissent from the “voice” of the company’s executives. But these guys don’t reach that kind of issue, because they push most corporations off the analytical table at the outset.

Second, they seem quite uninterested in the variety of shareholders. Some are big. Some are little. Some are public employee pension funds. Some are… other corporations. Suppose a corporation is a shareholder of another corporation. When that corporation seeks shareholder approval of a political expenditure, does Corporate Shareholder need to query IT’S shareholders? What if some of them are corporations. It’s turtles all the way down. But these authors don’t offer any view on how “far down” these owners need to inquire before someone has the power to just say “yes” or “no.”

A third and related problem: the authors seem to assume uniformity in motive of shareholders. But given the variety of kinds of shareholders, how can we talk about the “shareholders'” position vis-a-vis the “management?” 

More prosaically, think about the modern context within which corporations are acting. These authors favor a default corporate law that provides shareholders with a veto over the overall political budget of a corporation, as well as the ability to adopt binding resolutions dictating how those funds are spent. A key activist shareholder, such as a public employee retirement fund, may be aligned politically with a public employee union—which gets to make expenditures after Citizens United—and also have the power to prevent a leading political rival (the corporation they invested in) from speaking. That doesn’t seem right.

I agree with the authors that executives may use their ability to make corporate expenditures to further their own careers, and not to maximize shareholder value. But the same can be said whenever the management at a big corporation funds the ballet or ballot issues. If corporate law is going to impede the discretion management has over these kinds of expenditures, why limit it to political spending? It seems the same arguments apply to charitable spending as well.

Because the authors don’t seem willing to tackle the difficult antecedent issues, I don’t think their recommendations are very useful. They express concern, popular now, about corporate giving to “intermediary entities.” But by their own admission, their proposal would only apply to activity by large publicly traded companies. Remember Koch Industries? Not included—it’s not a publicly traded corporation.

Moreover, they don’t address the key issue animating the debate: how one is supposed to distinguish money contributed to an intermediary for political expenditures as opposed to money paid as dues, fees, or otherwise paid for the general support of the organization. They don’t attempt to argue, as some have, that everything should be disclosed, but they don’t seem to recognize a need to distinguish among payment, or offer an opinion on how that should be done.