The effects of Citizens United on Corporate Governance

ILLUSTRATED: The conservative activists on the Supreme Court do not know the problems they will cause corporate America

A corporation is a set of property rights granted by government. These legal rights afford a set of privileges and responsibilities vis-à-vis taxes, liability, control, and profits because the corporate form is the best way to aggregate capital for economic growth. Corporations can sue, be sued, and also dissolved, all for reasons of commercial efficiency. However granting corporations human rights represents a new benchmark of conservative legal theory.

The holding in the US Supreme Court’s 2010 holding in Citizens United v. FEC is a landmark freedom of speech case. It allows corporations to spend unlimited amounts of money to expressly advocate the election or defeat of specific political candidates in the name of free speech. This overturns over 100 years of legislation and jurisprudence regulating the financing of campaigns.

The jurists in the majority of Citizens United seem to like the idea of giving human rights to property. Their prior rulings have generally been pro-commerce, and they found a case that blends capitalist interests with speech rights. However, despite their ideological bent towards business, none of the five conservative jurists has ever been in business. Meaning, they have never had profit and loss authority in a business. Nor do any of them have substantial consulting experience in modeling a business. Therefore it is not surprising that nowhere in the opinion of Citizens United is any discussion on the effects of this ruling on the efficiency of running a corporation.

Here are some of the unknown factors for corporate governance in the United States:

Foreign Corporations

The holding explicitly dodged the issue of foreign ownership. This writer attended the oral arguments, and the first set of questions from the justices was about the issue of foreign influence in political campaigns. Concern came from justices on both ideological wings, and they did not appear satisfied with the protections to the American interest.

Nevertheless, the ruling could mean that corporations organized in a foreign country, or where foreigners hold more than 50% of the shares. Whether a foreign government or foreign individuals own a corporation, the implications are vast. Trade policy, military technology, and foreign policy could all be influenced from abroad. Essentially, a corporate shell could be used by governments, foreign financiers, political groups, or even terrorist and criminal groups as a vehicle to help elect certain politicians in the United States.

Shareholder Rights

With domestic corporations, inevitably there will be shareholders with differing political and policy agendas than the board, which might be different than the CEO’s. Shareholder meetings could become mini-political conventions. For example, suppose an agricultural company is located in a congressional district near the Mexican border. The incumbent candidate is seen as favoring a regularized process for seasonal migrant workers, and is a vocal leader of the pro-creationism caucus in Congress. The shareholders at the annual meeting might be militantly anti-immigration, and the CEO might be very pro-science. But the board only cares about a free flowing immigration policy. Shareholders would want their dividends bigger, the CEO wants to affirm certain values, and the board wants profits. The potential for discord is immense.

Similarly, an employee owned company in the Rust Belt might have a local member of congress who opposes climate change legislation since most constituents fear for their industrial jobs. The CEO might want to support a candidate who supports climate change legislation and including subsidies for wind turbines, since the CEO wants to convert to wind turbines. However the employee-owners may oppose that, thinking their jobs are threatened, might oppose a CEO’s desire for political donations from the corporate treasury.

Corporations, particularly if they are publicly traded, already have a myriad of competing agendas. Adding in public issues will simply add more burdens to organizational cohesion and morale.

Subsidiaries

There are several scenarios where a parent company and a subsidiary could have different policy agendas. For example, a parent company located near a border or a major seaport might have a large stake in international trade, and local members of congress will be more inclined to also. However, a subsidiary involved in manufacturing might be harmed by the current trade regime. A majority of shareholders of the parent company might come to the conclusion that anti-trade politicians should be supported, while the board based in a coastal area might think otherwise. The shareholder derivative lawsuits could be unending, now that campaign money is a level of influence in the company.

Corporate Veil

Corporations could very well become vehicles to move, some would say launder, capital for business to affect a political agenda. If two candidates have similar economic policies, but are wildly variant on social issues, the potential for board members and officers to abuse the corporate treasury abound. Companies could be bought over solely to have their assets raided for campaign cash. Closely held corporations and family owned businesses have yet another item to fight over.

Corruption of the public agenda was the primary reason for limiting corporate contributions to campaigns for the last century. However, upon looking at the implications, of Citizens United, these regulations might actually have been for the corporations’ own good.

Corporate Money for the Democratic Party

ILLUSTRATED: There is cash for Democrats in the knowledge industries

A long held notion in American politics is that “Big Business” supports a certain set of pro-capitalist ideas. Colloquially known as “economic conservatism,” this agenda is manifested in policies which are long ingrained in the Republican Party platform. The Supreme Court’s ruling in the case Citizens United v. FEC is expected to unleash a torrent of corporate money to influence elections.

But a look at the future of American business suggests that the Democratic Party and the political Left can do well financially in this new paradigm. Essentially, Republican economic policy posits that a “pro-business environment” means low taxes and low legal and regulatory accountability. Essentially by decreasing the expenses of doing business that are associated with government, and businesses will thrive. The Republicans and their integrated media-finance-grassroots complex are very good at propagating that message.

For Democrats, their conception of a “pro-business environment” is less artfully communicated, but it is essentially a “high education, high infrastructure” environment. Scholars like Richard Florida and writers like Thomas Friedman have cited much data suggesting that America’s metropolises with the largest concentrations of educated people are producing a vastly disproportionate amount to economic output. Anyone eavesdropping a conversation in a wine bar in San Francisco or Washington, DC is likely to overhear conversations reminiscing about times living in Boston and Seattle, or impending moves to grad schools in New York or Chicago. Essentially, about ten metropolitan areas are attracting a large share of people with contemporary job skills and business savvy.

It should be noted that most of these cities mentioned have very high local taxes. Additionally, as bastions of the Democratic Party at the local level, generally have a lot of local business regulations intended for the public interest. Trial lawyers tend to think of these places as “plaintiff friendly” regarding judge and jury pools. However, for the industries concentrated in these areas, having educated people is more important than avoiding a surtax for community colleges. Having public parks powerful wi-fi antennas spurs more economic growth than would a lax zoning law that allow for the development of parkland.

What types of industries are centered in these cities? Generally they are industries in which intellectual capital is the basis of their business models. In other words, patented knowledge is today what owning farmland or factory space used to be in centuries past. High tech, clean tech, biotech, media, and entertainment industries are some of the industries where America is at a competitive advantage. The culture, laws, and social systems in the United States facilitate innovation. These industries need advertising firms, investment firms, consulting firms, and law firms that understand their business to support them. Thus, these types of companies need a lot of educated people near them. Those who want to do business with them in person or virtually need good roads, rails, and broadband lines. These industries do not need government out of the way, so much as they need government to help develop the human capital and platform to thrive in.

A public policy agenda that aims to effect an educated population, a livable ecological system, and a stable financial system will get support from much of the business community.

Higher education, including vocational and community colleges, will be crucial as these industries account for more and more of American commerce. For example, applicants for janitorial jobs at biotech firms need a special certification to dispose of the material. Candidates who support these educational institutions ought to be the recipients of campaign donations from these New Economy companies.

Environmental issues are not just the interest of clean tech companies. Several types of businesses realize that alternative energy will lower their costs of doing business in the long run. Industries in coastal areas will eventually catch on to the fact that rising sea levels will lead to population migrations inward, not to mention the lowering of property values on the coast.

Much of the small business community will welcome a comprehensive regulation of the financial system to ensure predictable interest rates and regular access to capital. Essentially, the financial system is so much in the public interest, it cannot be completely trusted to the whims of private actors.

There are well known consevative groups and think tanks like the ready to spring into action getting corporate America in the election process. I do predict in the coming years that new lobbying groups will form focused on higher education, a sustainable environment, and other progressive causes that help certain businesses. These groups can issue report cards on the voting records of legislators and new candidates, inducing a flow of corporate money to those campaigns.

To be sure, the conservative movement and the Republican Party will be the net victors of this change in campaign financing in the foreseeable future. However, at this writing in early 2010, two trends suggest that traditional big business interests will lose their control of the Republican Party. First, is the fact that the Great Recession is bringing a rapid end to the Industrial Age, and firms based on intellectual capital will gain in relative prominence. Secondly, the antiestablishment “tea party” populism in the GOP could force a fundamental compromise in the party’s agenda away from those who control capital to a more equitable economic policy. Corporations may not want to support candidates who end up winning Republican primaries railing against the excesses of the financial firms.

If the leaders of the Democratic Party and political Left can organize themselves and hone a message to the business community, they can remain a well funded force in American politics.