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.