Fueled by the landmark decision in Citizens United, which granted corporations essentially the same political speech rights as humans, corporations continually attempt to control political outcomes, ostensibly to promote shareholder value.[1] During the 2022 election cycle, corporations and business groups spent over $4.1 billion on political lobbying.[2] In the last presidential election, total advertising expenditures reached $8.5 billion, with most coming from corporate treasuries.[3]
Perhaps to avoid a backlash from the market, corporations increasingly opt for a clandestine approach to political activism, with a striking amount of their spending contributions going to “dark money” entities.[4] In the last presidential election, estimates of expenditures from dark money groups exceeded $1 billion.[5] Despite the difficulty in tracing contributions, recent studies suggest corporations gave more than $750 million to dark money groups during the 2020 election.
The desire of corporate managers to evade public scrutiny for their political activism runs counter to the basic plea for transparency in Citizens United.
In both the securities and political realms, transparency remains the primary tool to combat corporate fraud.[6] But without mandatory disclosure regarding corporate political spending, “shareholders have no way to assess whether corporate political spending benefits them, and [have] every reason to believe it is fraught with risks to the corporate brand, business reputation, the bottom line and, by extension, shareholder returns.”[7]
Despite persistent calls for mandatory disclosure of corporate political spending from investors, market professionals, politicians, academics, and regulators, corporations currently face no such disclosure requirement. In fact, Congress continues in its latest omnibus budget bill to prohibit the SEC from using any of the funds appropriated “to finalize, issue, or implement any rule, regulation, or order regarding the disclosure of political contributions, contributions to tax exempt organizations, or dues paid to trade associations.”[8]
As an alternative, could existing common law principles governing corporate insider trading provide a way to curb clandestine corporate political spending? Although federal securities laws provide a statutory foundation for prohibiting insider trading,[9] the U.S. Supreme Court bases insider trading doctrine on common law fiduciary duties that govern corporate managers and boards of directors.[10] As for how those fiduciary duties operate to stem illicit insider trading, the Supreme Court imposes a special disclosure obligation not found in other corporate contexts. According to this fiduciary approach, to avoid liability for improper insider trading, a corporate insider who possesses material nonpublic information must either disclose it or abstain from trading.[11] That requirement arises from the fiduciary trust that binds corporate managers to shareholders and the basic notion that corporate insiders cannot use company assets (i.e., inside information) for personal gain at shareholders’ expense.[12] Only through adherence to the “disclose or abstain” rule can corporate insiders ensure a level playing field and meet their fiduciary obligations.
Does it make sense to apply to corporate political spending the same “disclose or abstain” rule? The answer depends on whether failing to disclose corporate political spending represents a similar breach of trust as trading based on material nonpublic information. The basic inquiry is whether corporate managers are pursuing their own personal interests when using the corporate treasury to support political causes or candidates. The business case for corporate political spending remains suspect. As Leo Strine and Dorothy Lund make clear, engaging in political activism creates huge risks that do not empirically promote corporate profitability.[13] Absent a positive correlation between corporate profits and political activism, clandestine corporate spending raises strong suspicions that managers are using corporate assets to advance their personal agendas to the financial detriment of shareholders.[14] Most certainly, corporate managers would assert that political spending advances the interests of the company by promoting a more favorable regulatory environment. But there is no way to tell without full disclosure.[15] As corporations become increasingly powerful, some of the most important political decisions get made in the corporate boardroom rather than in public.[16] Therefore, just as prohibitions on insider trading aim to prevent corporate managers from using company assets to pursue monetary gain, there should be rules that stop corporate managers from using company funds to promote personal political agendas.
Relying on fiduciary principles to curb clandestine corporate spending should not seem odd, considering the basic “abstain or disclose” rule that the Supreme Court articulated. A fundamental breach of trust due to secret use of corporate assets for personal gain represents the same basic concern with respect to both insider tradingand clandestine corporate political spending. Even without a statute mandating political spending disclosures, a common law fiduciary rule that corporate managers must disclose the amount and target of corporate political expenditures or refrain from engaging in political activity seems to fit neatly within the existing corporate fiduciary framework. In the end, such a rule for corporate political spending would promote greater efficiency in the capital markets, ensure corporate accountability, and promote political legitimacy.
ENDNOTES
[1] See Omari Scott Simmons, Political Risk Management, 64 Wm. & Mary L. Rev. 707, 760 (2023).
[2] Taylo Giorno, Federal Lobbying Spending Reaches $4.1 Billion in 2022—The Highest Since 2010, OpenSecrets (Jan. 26, 2023), https://www.opensecrets.org/news/2023/01/federal-lobbying-spending-reaches-4-1-billion-in-2022-the-highest-since-2010/.
[3] Liz Kennedy, 10 Ways Citizens United Endangers Democracy, Demos (Jan. 19, 2012), http://www.demos.org/publication/10-ways-citizens-united-endangers-democracy [https://perma.cc/T2P7-6CMX]; see also Caroline Crenshaw & Michael E. Porter, Transparency and the Future of Corporate Political Spending, Harv. L. Sch. F. On Corp. Governance (Mar. 15, 2021), https://corpgov.law.harvard.edu/2021/03/15/transparency-and-the-future-of-corporate-political-spending/ [https://perma.cc/9NH4-B7RU] (“[W]ell-accepted management theory shows why the role of American business in politics has become so counterproductive: the short-term rewards of socially destructive lobbying are too tempting for executives under constant pressure to maximize earnings.”).
[4] Dark Money Basics, OpenSecrets, https://www.opensecrets.org/dark-money/basics [https://perma.cc/J7YW-EC89].
[5] See Ephrat Livni et al., Money in Politics, One Month Later, N.Y., Times (Feb. 6, 2021), https://www.nytimes.com/2021/02/06/business/dealbook/corporate-donations-politics.html; Anna Massoglia, “Dark Money” Groups Find New Ways to Hide Donors in 2020 Election, OpenSecrets (October 30, 2020), https://www.opensecrets.org/news/2020/10/dark-money-2020-new-ways-to-hide-donors.
[6] See Michael R. Siebecker, Trust & Transparency: Promoting Efficient Corporate Disclosure Through Fiduciary-Based Discourse, 87 Wash. U. L. Rev. 115, 117-18 (2009).
[7] See Editorial, Keeping Shareholders in the Dark, N.Y. Times (Dec. 4, 2013), at A32.
[8] https://www.congress.gov/bill/117th-congress/house-bill/2617/text.
[9] See Sung Hui Kim, The Last Temptation of Congress: Legislator Insider Trading and the Fiduciary Norm Against Corruption, 98 Cornell L. Rev. 845, 854-56 (2013).
[10] See Donna M. Nagy, Insider Trading and the Gradual Demise of Fiduciary Principles, 94 Iowa L. Rev. 1315, 1317-22 (2009).
[11] See Zohar Goshen & Gideon Parchomovsky, The Essential Role of Securities Regulation, 55 Duke L.J. 711, 734-35 (2006).
[12] The fiduciary relationship exists not just between the insider and existing shareholders but to potential shareholders as well. See Chiarella v. United States, 445 U.S. 222, 227 n.8 (1980) (quoting Judge Learned Hand’s statement in Gratz v. Claughton, 187 F.2d 46, 49 (2d Cir. 1951).
[13] See Dorothy S. Lund and Leo E. Strine, Jr., Corporate Political Spending is Bad Business, Harvard Business Review (Jan.-Feb. 2022), https://hbr.org/2022/01/corporate-political-spending-is-bad-business; Ephrat Livni, On Voting Rights, It Can Cost Companies to Take Both Sides, N.Y. Times (June 5, 2021), https://www.nytimes.com/2021/06/05/business/dealbook/voting-rights-companies.html.
[14] See James Kwak, Citizens United v. FEC Turns 2–And It’s Still Wrong, ATLANTIC (Jan. 20, 2012), https://www.theatlantic.com/business/archive/2012/01/citizens-united-v-fec-turns-2-and-its-still-wrong/251706/ (“[I]f corporations’ political spending were left up to individuals, like executives or directors, those individuals could advance their personal interests by directing money to their preferred political organizations.”) [https://perma.cc/R2JQ-PCBM].
[15] See Benjamin Edwards, The Implications of Corporate Political Donations, American Bar Association (Oct. 24, 2022), https://www.americanbar.org/groups/crsj/publications/human_rights_magazine_home/economics-of-voting/the-implications-of-corporate-political-donations/.
[16] See Michael R. Siebecker, A New Discourse Theory of the Firm After Citizens United, 76 Geo. Wash. L. Rev. 161, 164-165 (2010).
This post comes to us from Professor Michael R. Siebecker, the Maxine Kurtz Faculty Research Scholar at the University of Denver’s Sturm College of Law. It is based on his article, “Political Insider Trading,” available here.