Thursday, June 21, 2018
Opinion

Stockholders should have a say in PAC spending

Political action committees have become pervasive in funding the American electoral process. They date back to early in the 20th century and were regulated with their spending controlled. Two recent decisions by U.S. courts changed all that.

In Citizens United vs. FEC, the Supreme Court overturned key parts of the McCain-Feingold law by ruling that corporations (and labor unions) have a free-speech right to participate in the political debate through direct contributions to independent PACs, or super PACs. In SpeechNow.org vs. FEC, the U.S. District Court of Appeals for the District of Columbia held that contributions to independent PACs cannot be limited. The result has been an infusion of many millions for political campaigns.

But if the courts have allowed unlimited spending, the shareholders of publicly held companies don't have to. In fact, they may have good reason to restrict super PAC spending by the companies they invest in.

First, the decision to contribute to a PAC is usually made by management. It is well known that the interests of management are not always aligned with those of the shareholders, who are the real owners of the corporation. When that alignment is poor, it stands to reason managers might well make decisions to spend shareholder money supporting causes of little interest or benefit to investors.

Even when management is acting to further the interests of the firm, there exists the potential for corruption. Donations to political campaigns, whether from individuals or corporations, are made to support candidates who have beliefs similar to those of the donor; but, on closer inspection, there are some big differences. Most individual contributions are small relative to the total money raised, so the candidate is less likely to feel indebted to the donor. A corporation, on the other hand, has the financial wherewithal to make much larger contributions, increasing the likelihood that a candidate will feel and act in deference to the donor's agenda.

When individuals make political contributions, they are likely seeking support for actions (tax reform, health care, etc.) that will affect a large group of voters and not simply one individual. By contrast, a firm may be seeking very specific legislation that will benefit it alone. This is where the potential for corruption arises — a donation can look like a bribe, whether real or merely in appearance. Sen. John McCain is quoted as saying: "On both sides, we have these incredible amounts of money, and I guarantee you there will be a scandal."

Any scandal related to a specific corporate PAC donation is bad for the donor firm's stock price. Thus, shareholders have every incentive to exert some control over these contributions. There is no question about the right to free speech — the Supreme Court has settled that issue; the question is about who will exercise it within the corporation. That group should be the residual owners, the shareholders.

Shareholder activists have begun offering resolutions to control certain aspects of corporate participation in super PACS. These range from requests for transparency to limits on the allowable amount to be spent and issues supported.

For example, donations to PACs supporting social issues might be proscribed because there is no direct benefit to the business. The strongest resolutions would ban corporate contributions to super PACs altogether. These resolutions have come under attack by those who see any such restrictions as a violation of corporate free speech; however, a corporation is mute unless given a voice by its management, board of directors, or stockholders. It is the stockholders, as owners of the firm, who should raise that voice — or quiet it.

Richard Meyer is professor emeritus in the College of Business at the University of South Florida.

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