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Torres-Spelliscy: Shareholder Consent is Key in Political Spending

Thanks to five members of the Supreme Court in the Citizens United case, CEOs are free to spend shareholders’ money on politics. Will Congress protect investors? We don’t know, yet.

In a Thursday Congressional hearing, corporate law experts debated how best to improve corporate governance. Most of the experts agreed: Current laws don’t protect shareholders.

Professor John Coffee of Columbia Law School and Nell Minow of the Corporate Library eloquently told Congress that we can make corporate political spending more transparent and more accountable by changing U.S. securities laws.

Shareholder consent should be part of the post-Citizens United reform package. There are numerous ways to structure shareholder consent rules: Sen. Sherrod Brown (D-Ohio) introduced S. 3004, the Citizens Right to Know Act, which requires shareholder consent to corporate electioneering communications. And Rep. Mike Capuano (D-Mass.) introduced H.R. 4537, the Shareholder Protection Act, which requires shareholder consent for a range of corporate political contributions and expenditures.

Or, Congress can look to the United Kingdom to get a sense of shareholder consent rules in action; British law has required shareholder consent for corporate political spending since the British Companies Act was amended in 2000. Now British law allows corporate managers to spend corporate funds on politics — but with prior shareholder approval. This comes in the form of a resolution proposed by management and voted by shareholders usually during the company’s normal proxy season. The Internet is full of such shareholder resolutions, many of which appear as attachments to annual general meeting announcements.

The facts in the U.K. argue against those who insist that shareholder consent will only incite greater corporate political spending. British corporate political spending is down significantly. In fact, many U.K. companies have stopped political donations entirely.

At a recent Brennan Center for Justice-sponsored forum at New York University Law School, even First Amendment hawk Floyd Abrams (who, during arguments in Citizens United, urged the Supreme Court to uphold absolute political speech rights) said shareholder consent is a reasonable way to limit corporate spending in political election campaigns.

Full disclosure should be a central reform component. But naked disclosure alone isn’t sufficient because the exceedingly lax “business judgment rule” provides managers with a giant loophole and lots of leeway. Aggrieved shareholders can file derivative suits, but they aren’t likely to succeed. This gives shareholders two unsatisfactory options: They can launch costly, implausible efforts to oust the board, or they can sell off shares — possibly at a loss. Neither option provides a way for shareholders to consent to corporate political spending. Shareholder consent should be the centerpiece in any post-Citizens United reform plan.

Ciara Torres-Spelliscy is an attorney at the Brennan Center for Justice at NYU School of Law and the author of “Corporate Campaign Spending: Giving Shareholders a Voice.”

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