Citizens United and the shareholder protection gambit

Cite this Article
Larry Ribstein, Citizens United and the shareholder protection gambit, Truth on the Market (October 25, 2010),

Last January in Citizens United the Supreme Court delivered a blow to the opponents of corporate speech by enabling corporations to spend directly on political campaigns rather than relying on PACs and lobbying. A majority of the Court concluded that public debate could be best promoted by protecting all speech, regardless of speaker. 

A sizable chunk of America thinks the Supreme Court has unleashed a corporate monster that will drown out the rest of the populace.  For example, a hysterical MarketWatch column (HT Bainbridge) asserted that “[u]nder this system, the game is over. Our democracy is dead.”  This pundit figured that corporations could use their spare cash to buy any number of elections, apparently not understanding that firms need this cash for other things.  He notes that money is flooding into “right-wing groups” but neglects to count up the union cash flowing in the opposite direction.

In any event, what can CU’s opponents do about that pesky Supreme Court opinion?  Maybe try an end-run:  limit corporate speech in the name of “shareholder protection.” And so we have the Shareholder Protection Act (SPA) currently pending in Congress.  But what I’ll call the “shareholder protection gambit” (hereafter, SPG) is unlikely to work. 

To begin with, let’s be clear that it’s not really about shareholder protection.  The “purpose and summary” supporting the SPA makes this transparent in its opening sentences: 

The [Citizens United] ruling invalidated longstanding provisions in U.S. election laws and raised fresh concerns about corporate influence in our political process. To address those concerns, the Shareholder Protection Act gives shareholders of public companies the right to vote on the company’s annual budget for political expenditures.

In other words, the bill is concerned about “corporate influence.”  Shareholders’ rights are intended “to address those concerns.”  But Citizens United explicitly rejected this “corporate influence,” or anti-distortion, rationale for corporate speech limitations.  

The shareholder protection rationale not only differs from, but is directly contrary to, the concern that activates the opposition to Citizens UnitedCU opponents worry that corporate political activity will empower corporations by flooding the political marketplace with pro-corporate money.  Yet the SPA is supposedly intended to ensure that lobbying serves corporate interests.

Whether or not shareholders’ protectors are seeking to restrict corporate speech, that’s what they’re likely to accomplish.  The shareholder rights the SPA would create cut at the core of corporate efficiency.  The main point of the corporate form is to “lock in” corporate resources under strong managerial control.  Enabling shareholders to second-guess specific managerial decisions, and introducing political debate into shareholder and director meetings, is an effective way to hobble corporations. 

Whatever its intent, the SPG, including its manifestation in the Shareholder Protection Act, is dubious policy. Here it’s useful to examine recent work by prominent and bona fide defenders of the shareholder protection gambit, John Coates and Lucian Bebchuk and Robert Jackson.  Neither has a coherent agency cost theory of corporate managers’ investments in corporate political activity — that is, why they would choose to abuse their power in this particular way.  Perhaps they can’t take it all out in pay, but surely there are more satisfying perks.  Nor do these writers show how managers’ use of corporate money for political expenditures presents a more serious agency cost problem than many other exercises of management power.  The most that Bebchuk-Jackson can come up with is that corporate political speech has “expressive significance.” But the idea that shareholders generally, many of whom now invest through pension and mutual funds, care deeply about the political expenditures of individual firms in their portfolios needs far more support than B-J’s brief hypothesizing.

Coates at least has some data.  He lists a number of hypotheses regarding corporate political activity, including that it helps the corporation and constitutes efficient compensation.  However, his his tests are not strong enough to reject non-agency-cost explanations.Coates shows that the existence and amount of firms’ corporate political activity negatively correlates with (1) shareholder democracy variables and (2) corporate value as measured by Tobin’s Q.  But (1) could equally support proponents of strong management control who assert that too much shareholder democracy is inefficient.  The correlation with corporate value could mean, among other things, that firms that are hurt most by regulation need to spend more to get the government off their backs.    

There are several other problems with the shareholder protection gambit.  Its advocates can’t explain why it is so important to protect shareholders from managers running amuck with campaign expenses but not to be concerned about corporate payments to lobbyists or managers funding PACs, both of which are exempted from the Act. Perhaps Congress does not want to completely turn off the corporate spigot.  Maybe politicians would prefer to insulate themselves from corporate-funded opposition when they reneg on their promises.  But it is not clear what these distinctions have to do with shareholder protection.

And it’s odd that after all of the literature and commentary on the problems of shareholder voting, including the fundamental free-rider problem, the distinct interests of institutional investors and activist hedge funds and concerns with “empty” voting, as well as skepticism about the value of ever-increasing disclosure to already-inundated shareholders, that informed shareholder voting should be seen as the means of liberating shareholders to express themselves.

Finally, the SPG faces serious constitutional problems following CU. The Court in Citizens United rejected the “shareholder protection” argument for banning corporate speech, noting among other things that “the procedures of corporate democracy” can protect against any abuse and that “the remedy is not to restrict speech but to consider and explore other regulatory mechanisms. The regulatory mechanism here, based on speech, contravenes the First Amendment.” This language suggests any shareholder protection defense of corporate speech regulation faces a steep uphill climb. 

The SPA is unlikely to survive this climb.  Consider the restrictions on speech it seeks to impose:

  • Majority shareholder authorization of “specific” expenditures a year in advance, thereby shackling effective corporate responses to constantly shifting legislative activity.
  • Unprecedented (for the securities laws) treble damage “fiduciary duty” liability for unauthorized expenditures.  This is likely to have a significant deterrent effect on pro-shareholder political activity, since risks to managers would dwarf any potential gains from speech that serves corporate interests.
  • Extensive quarterly and annual disclosures.
  • Significant federal regulation of formerly state-controlled corporate governance issues.
  • The SPA would apply only to corporations, with no equivalent constraints on unions.

Although the Supreme Court might tolerate some shareholder-protection regulation of speech, its reasoning in CU suggests it will not be receptive to provisions like this.  CU stressed the social value of speech.  This doesn’t mean the shareholders have to subsidize anything corporate managers want to say, but it does mean that the Court will want more than just a shareholder-protection fig leaf to justify a massive increase in the burdens of corporate speech.

The SPA will not strengthen corporate governance, but rather cut corporate political activities back to the lobbying and PACs permitted under pre-Citizens United law.  In other words, it’s designed to reverse CU.  The Court is not likely to miss this fact.