Shareholders Should Have Final Say on Corporate Political Spending, Argues Professor Robert Jackson

In New Law Review Article, Corporate Governance Expert Says Spending Should be Overseen by Independent Directors, Not Company Executives

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New York, Oct. 27, 2010—When the Supreme Court ruled earlier this year that the First Amendment allows corporations to spend funds on political advertising, it left unanswered the question of who should decide whether a company should head in that direction.
A new law review article, co-written by Columbia Law School Associate Professor Robert J. Jackson Jr. and Harvard law professor Lucian A. Bebchuk, argues that shareholders should have a greater say in determining a corporation’s political spending and its nature, as well as a veto over the amount spent on political speech.
The authors, both corporate governance experts, would also require that political speech decisions be overseen by independent directors, so as to reduce conflicts of interest.
“The basic problem arises from the fact that political spending decisions may be a product not merely of a business judgment as to what will benefit the company’s bottom line, but also of the directors’ and executives’ political preferences and beliefs,” write Jackson and Bebchuk.
Jackson, who joined the Law School faculty this year, teaches a class on the law, economics, and regulation of executive compensation.
The article is in the November issue of the Harvard Law Review.
The boundaries of corporate political speech were strengthened in January when the
U. S.Supreme Court, in Citizens United v. FEC, ruled 5-4 that the government cannot ban political spending by corporations for elections.
Amid concerns that corporate dollars would overwhelm the electoral process and skew the outcome of tightly contested races, legal scholars have begun to look at how corporate political speech can be regulated in a way that is constitutionally permissible.
One way, argue the authors, is to allow shareholders to have a veto over the amount of corporate resources spent on political speech as well as how it is spent. Currently, such expenditures are governed by the same rules as ordinary business decisions, which give executives wide latitude over how money is spent.
The authors write that involving shareholders in these decisions would not be unduly burdensome, as votes could be taken through a proxy vote as part of the company’s annual meeting. In fact, such a requirement has been in place in Britain for more than a decade.
“The power to adopt such resolutions will make it more likely that not just the amount of the budget, but also the chosen targets, will be consistent with shareholder interests,” write Jackson and Bebchuk.
They also favor having corporate speech decisions overseen by independent directors rather than a corporation’s executives, as the interests of executives may diverge from those of shareholders.
To reinforce the need for this, Jackson and Bebchuk provide an example of a CEO who spends a “trivial amount” on an ad for his or her company that expresses a political position anathema to most shareholders.
“While shareholders may be practically indifferent to an ordinary business decision … that results in a cost of such an amount, they might feel differently about spending on the advertisement that associates their company---and, indirectly, the shareholders themselves—with such a political position.”
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