A decade ago, the U.S. Supreme Court changed the rules on how businesses could donate to political campaigns. Since then, hundreds of millions of corporate dollars have been spent on local, state, and federal elections, often without transparency. Many CEOs and boards feel this is the only way they can curry favor with policymakers. Dorothy Lund, an associate professor of law at the University of Southern California, and Leo Strine Jr., counsel at Wachtell, Lipton, Rosen, and Katz and a former Chief Justice of the Supreme Court of Delaware, say this isn’t just bad for democracy. It’s bad for business because it distracts companies from innovation and growth and risks serious backlash from consumers, employees, and shareholders. They suggest ways to dial back corporate political spending and improve the economy for all. They are the authors of the HBR article “Corporate Political Spending is Bad Business: How to Minimize the Risks and Focus on What Counts.”
ALISON BEARD: Welcome to the HBR IdeaCast from Harvard Business Review. I’m Alison Beard.
In 2010, the U.S. Supreme Court issued its ruling in the Citizens United versus Federal Election Committee case. Companies were free to fund political candidates and campaign committees. Whereas before those donations were limited and had to come from a pool of money collected from employees and shareholders, they’re now unlimited and can be paid out of the corporate treasury. And it’s a lot of money. Hundreds of millions of dollars.
Many people think this is really bad for our democratic process. Today’s authors say it’s also bad for business. It locks companies into an influence buying arms race, opens them to criticism when their public ESG stances don’t align with those of the politicians they support and distracts them from more important work.
Dorothy Lund is an Associate Professor of Law at the University of Southern California. Leo Strine, Jr. is council at the law firm of Wachtell, Lipton, Rosen, and Katz and the Michael L Wachter Distinguished Fellow at the University of Pennsylvania’s Kerry Law School. He’s also former Chief Justice of the Supreme Court of Delaware.
Together, they wrote the HBR article “Corporate Political Spending is Bad Business. How to Minimize the Risks and Focus on What Counts.” Dorothy, Leo. Welcome.
DOROTHY LUND: Thanks so much for having us.
LEO STRINE: Good to be with you.
ALISON BEARD: So, let’s set the scene for everyone. The Citizens United ruling allows corporations to do what that they couldn’t before 2010?
LEO STRINE: Well, before 2010, the only way that corporations could give in the political process was by raising money voluntarily through a pack from employees or stockholders. In Citizens United, the Supreme Court issued a broad ruling, basically saying that corporations can give from their so-called treasury funds and make unlimited political expenditures. And that is something that corporations had never been allowed to do really since the advent of corporations and campaign finance laws in the United States.
And when you’re not allowed to do something, people can’t ask you to do it. It was kind of good for businesses to be limited in their ability to give because if you’re able to just say, we’re not allowed to give, then that’s an easy way to say no. And Citizens United turned that dynamic upside down and allowed businesses to give money without getting any specific authorization from stockholders and without having to raise it specifically for that purpose from employees or from stockholders.
ALISON BEARD: And what was the result or fallout? Exactly how much do we see corporate political spending increase?
LEO STRINE: A flood of corporate money. It’s hundreds of millions of dollars. It’s probably, right Dorothy, approaching billions now.
DOROTHY LUND: Yeah. Part of the problem is that you can’t even tell exactly what’s going on. So, much of this money is coming in the form of dark money organizations that don’t have to disclose who’s donating it. But, the most recent calculation from Open Secrets estimated that in the 2020 election alone, there was a billion dollar spent in dark money on that election, which is the high point.
ALISON BEARD: On the surface, though, it does seem like it’s a good thing for companies to have more of a say in who’s getting elected and what policies or regulations are getting passed. Maybe it’s not great for democracy or the little guy, but it’s definitely good for the corporations engaging in it. Why do you argue that it’s actually bad? That the negatives outweigh the positives?
DOROTHY LUND: I think we mean bad business in a few different ways and I’ll just highlight two. The first is this the classic sense that there is actual evidence suggesting that companies that spend more on politics, that spending is correlated with lower firm value. And I think this makes intuitive sense to us because if you are competing on regulatory shortcuts, you’re not going to be so well positioned to profit by selling quality goods and service by evolving over time to meet the needs of your consumers.
We also mean bad in a different sense in that this spending lacks legitimacy and the basic idea there is that under this traditional balance of power in corporate law, you’ve got corporate managers who are deciding how to allocate corporate assets.
So, of course, this is true of political spending, too. They’re deciding when they’re spending treasury dollars. They’re doing this without input from the people that are forking over the money. Academics for a long time have focused on this, calling this an agency problem. The idea that sometimes you have corporate managers who are out there using their control in ways that’s not going to benefit the shareholders or the company. You’ve got shareholders with all sorts of diverse political views who are investing in companies, not expecting to have their invested dollars spent in these ways.
LEO STRINE: For example, we know that more Americans are Democrats than Republicans and there are many, many independents. But, we cite in the paper that 60% of CEO donations went to Republicans. And that since Citizens United, in terms of corporate spending, $282 million went to Republican candidates versus $38 to democratic candidates. Now, even if you assume the investor class is wealthier on average than the typical American, and that would be true, it’s pretty clear the investor class is not as skewed as that in one political direction.
DOROTHY LUND: You got to remember, too, that most of these shareholders are broadly diversified. They’re holding a portfolio of companies. They’re holding index funds or ETF’s. So, they’re not going to benefit from one company’s rent seeking. That’s benefiting that one firm at the expense of another. And they’re not going to benefit from that increase in externalities that results from this political spending that they’re going to bear as taxpayers and in other ways.
LEO STRINE: If every single sector of the economy simply turns regulatory policy in their direction, and therefore the companies have their way, that doesn’t mean there’s more overall economic growth for the American public. It can simply mean that there’s more pollution, there’s worker injuries, and it can actually be a drag on real economic growth.
I love sports and particularly soccer, which is the British word for association football, is if a referee doesn’t call the rules, doesn’t enforce the rules, by the end of the game, it’s not that everybody’s acting in a more civilized manner. It’s that the best players, even Leo Messi, are kicking people to survive.
What happens to companies that are trying to do business the right way in a sector if other companies can do it the wrong way and tilt regulatory policies that way, the tendency is for the whole sector to move in a way that’s less productive in the long run for society.
ALISON BEARD: So we’ve talked about the hits to innovation and productivity, I guess, because companies are focusing on this instead of directing all of their efforts to getting better at what they do. We’ve talked about potential investor backlash. Customer and employee backlash also a problem?
LEO STRINE: Sure. I mean the nature of customer bases, employee bases, and the concerns companies… Part of why the companies have reacted to George Floyd and to inequality during the pandemic is because they have increasingly diverse customer and employee bases. And so, some of them have admirably spoken out, right? In situations where they feel like there’s been a threat to equality. When it turns out though that the company is giving a ton of money to political committees that have put in place ballot restriction, access laws targeted to minorities, that’s a difficult thing to deal with in terms of your customers and employee base, right?
DOROTHY LUND: Yeah. The two examples that we touch on in the article involve contributions to state committees, or in one case at gubernatorial candidates. So, the example involving Target had given to a state level group $150,000 that ended up supporting a campaign for a candidate who’s running for governor in Minnesota. And it quickly came to light that this particular candidate had made homophobic statements and opposed LGBTQ rights. And this ended up being a huge problem for Target when this came to light because they had worked very hard to portray themselves as a company as being committed to diversity, they went on to sponsor the Twin Cities Pride Festival. And so, this perception of not only support for this candidate, but actual hypocrisy that these donations were undermining values that the company had really stated that they embraced led to a huge backlash for the company and caused Target to make a major overhaul of its political donation practices.
ALISON BEARD: But if the Supreme court isn’t going to overturn its decision, what can we do?
DOROTHY LUND: Well, there are a couple different avenues that people can take. And one that is increasingly happening is that investors themselves are responding to this system with shareholder proposals and engagement seeking reforms. And there’s a popular form of proposal right now where a shareholder says, “Please disclose your political spending activities. Just tell us what you’re up to.” And there was a point not so long ago in 2019, none of those proposals passed. Two years ago or last year, six passed. And this current proxy season, that’s the most recent proxy season, there were more majority votes, more proposals being withdrawn because companies were agreeing to make changes. So, there’s also legislation. It’s something we don’t talk about much in our article, but would obviously make a big difference. There’s plenty of bills pending in Congress, in the Senate right now, including one that was introduced in the aftermath of January 6th by two senators that would mandate political spending disclosure, that would require a shareholder majority vote to approve any political spending activities. And we think this sort of thing would be great if it were to be passed.
LEO STRINE: A legend of investing, Jack Bogle, right? A Vanguard founder. He in the wake of Citizens United said, “I think you shouldn’t be able to spend money on politics unless there’s a 75% stockholder vote in favor.” Because that would be a real consensus.
ALISON BEARD: But what about employees too?
LEO STRINE: Right. Well, his I agree with… That’s a whole other stakeholder issue. By the way, unions have not been able to give through the political process except through voluntary contributions forever. It goes back to the 1970s and that’s because the Supreme Court said that unions couldn’t use treasury funds. The people who represent employees in society actually have to play by a different set of rules than the people who represent the monied interest. And so, when Mr Bogle, he was being very conservative. “Okay. Let’s say, it’s about stockholders. At least get their approval.”
I think what Dorothy and I are saying is the institutional investors ought to be stepping up and insisting on that kind of approval, at the very least disclosure. And Dorothy, I think one of the things I found most dismaying is some of them said, “Well, we’ll step up and vote as an institution if we think there’s a problem.” But the tip of the iceberg you can see ought to mean you move your Titanic away from it.
The bigger part is under the water. And how can they abstain on the grounds that we will abstain unless we know there’s a problem when they’re not even demanding the disclosure to let you know whether there’s a problem?
DOROTHY LUND: One of the things that is I would say funny, but I don’t know if it’s quite funny about the Citizens United decision and the Supreme Court and the majority who said, “Well, shareholder democracy should be sufficient to reign in bad behavior,” which just shows that they had no clue about how any of this works. I mean, none of this stuff is disclosed or is required to be disclosed. So you’re expecting shareholders to somehow figure out what this spending is and then, “Oh, okay. Well, we’ll band together and vote out the board of directors and get a new CEO based on this spending.” That’s just not how the world works.
ALISON BEARD: So, it sounds like our best hope is to persuade companies in your thesis. This in the long term is really bad for business, even if it can seem beneficial in the short term because it buys you a little bit of influence that-
LEO STRINE: We think continuing the pressure for Congress to require an investor mandate, this investor angle, having the institution step up. But also in our paper that Dorothy’s talking about is businesses themselves thinking more about the poor benefit to cost ratio of continuing to be involved in this. And if you’re going to be continuing to be involved in it, doing it much more carefully and much more thoughtfully, we think that would be much better for businesses.
And we think many of them may conclude, Allison, that if you’re going to do it right, it’s too costly in all kinds of ways than simply reverting to the pre Citizens United approach and reducing your involvement in the political process and saying that, “As a company, we live up to our stated values in how we act as a business and we certainly will lobby on behalf of things that we care about. But we think really our stockholders’ money ought not be used on political donations because they don’t agree on all these issues. We respect the diversity of their views and if they want to use the dividends we give them to donate to candidates, they’re free to do so.”
ALISON BEARD: So, you mentioned lobbying which is also buying influence in another way, even though it’s not donating to a candidate in a campaign in an election cycle. What’s the difference? Why is lobbying okay and campaign contributions aren’t?
LEO STRINE: Lobbying without contributions is just being heard. And you may have the advantage of being a business in that you can hire people who are articulate and know their stuff. Yeah, I’m much more sensitive to the First Amendment rights of businesses to be heard than about their ability to be heard by giving people cash.
I’ve spent a lot of time in government. If a company has a 1000 jobs in a community, their congressional delegation’s going to take it seriously. Shouldn’t need to be able to have to give them money to be taken seriously. It’s not lobbying in itself. It’s lobbying against the backdrop that our lobbyists are the face to you of enormous campaign contributions that in my view tilts the playing field.
ALISON BEARD: So, it goes beyond sort of a nice steak dinner when it’s…
LEO STRINE: Yes, I don’t think nice steak dinner. Frankly, to give credit to elected officials, they don’t have a lot of time for nice steak dinners. They just don’t. They’re too busy running between event and event having to raise money because of the kind of arms race we have. That’s not really where the influence comes in from big interest groups. It’s the wallet. And frankly, if the influence comes because you’re a major employer, that’s-
ALISON BEARD: Justified.
LEO STRINE: Yeah, exactly.
DOROTHY LUND: I think it’s an interesting question. And I agree with everything Leo said. I think some of what we talk about in terms of the risk to corporate leaders and corporations that are speaking out on certain issues, and then using their lobbying resources to go against that. Again, that, to us, is also something that corporate management should be aware of, that does create business risk, and you see examples of this all the time.
LEO STRINE: What I’m saying, Alison, is I wouldn’t shut down the lobbying.
DOROTHY LUND: Yes.
LEO STRINE: But I think this is another area for disclosure.
DOROTHY LUND: Exactly.
LEO STRINE: Even with the lack of disclosure, it’s really hard to keep everything secret. And your employees, for example, know so much, there’s such a rich information base online about what goes on in companies. And so, it’s really easy for a CEO to make a misstep, in good faith speaking out, but not have looked internally, for example, Alison, about whether their own behavior in internally is consistent with what they’re saying. And then what we’re saying is whether their political activities are consistent with what they’re saying.
And part of what our point is, if you’re going to do this, you have to do it right, and it’s not simple. And people say, here’s the simple thing to say, Alison, “Well, we’re just going to give to the people who can help us as a business.” Well, the problem with that is then you’re going to just end up giving money to just the people on the committees that regulate you at the state and local level, and those people are going to vote on a wide range of issues. And those issues may touch a and things like gender and racial equality, living wage, all kinds of things that go beyond just regulatory policy for your industry. And what do you do when you turn out that you gave to a US Senator who you can find a picture on wearing a Confederate uniform? Is it okay because that person is on the committee that regulates you? And that, yeah, Confederate sympathizers, people who are racially insensitive, as long as they help us with our regulatory policy, we’re just ducky with that?
DOROTHY LUND: And so, the more that companies are speaking out on these issues, the more there’s the risk that when they give to a candidate to foster a better business climate, or whatever business reason they have, it’s going to come back and bite them. And it did in the case of Target where they had a huge customer boycott. This led them to completely overhaul what it was doing with regard to its corporate political spending.
The risks are really real, and the more that companies feel pressure to speak out on hot button issues that are in the news, signing letters that run in the Wall Street Journal and the New York Times, the more likely it is that something like this is going to happen. They’re going to look like hypocrites if they’re not thinking about how to align their political spending, if they continue to do it.
And by the way, some companies have, one other example of when this got really difficult and challenging for companies is in the wake of January 6th. A lot of companies looked stupid when it turned out that they had been supporting candidates that had refused to certify the election results. So this led people to pause contributions. A couple of companies said, “We’re just not going to be in this game at all anymore.” This was Twitter, Charles Schwab, HP, dissolved their PAC, said this is not for us. And as this continues, as people have greater expectations for corporations to be other regarding, to not be involved in things that are leading to societal fissures, you’re going to have more risk. And more companies understanding this is your business interest, to get out of this game.
ALISON BEARD: Yeah. We talked about the fact that politicians take the money because everyone is doing it, and companies make the donations because everyone’s doing it, and you have to, to stay competitive. So when you talk to business leaders about stopping this practice, just no more campaign contributions, what do they say? Is there more of a willingness to go cold turkey now?
LEO STRINE: I think the problem is, remember, if a CEO dies in a pile at the bottom of a cliff with other CEOs, it’s okay. You just can’t die by yourself at the bottom of a cliff, which is why in mergers and acquisitions markets, when there’s the best buying opportunity, people aren’t buying low, they wait till everybody else is buying and they buy high because they can fail or succeed as a herd. So I think it’s difficult, and we point out in our paper, it’s difficult to be a leader, but I think leadership can pay off in terms of lack of distraction. And I think, particularly the larger companies that will be heard in any case because of the value they provide to society are well positioned to cut down this. I don’t hear from any CEO, or any general counsel, or anybody, that they like being involved in this. And I’ve got to say, it does not imbue them with respect for elected officials or the political process.
It just doesn’t, it’s a creepy game. Nobody involved in it feels unsullied, and that’s a good feeling, you know what I mean? They should have that feeling, because if they did feel unsullied, that would be really sad.
And so I think what we’re saying is, with some leadership, things can change fast. If the Business Round Table, for example, were to come up with some model policies, that could help. If, honestly, the big mutual funds were to agree that we’re going to start voting for proposals to require stockholder approval political spending plans, it could change within five years. I mean, because we’ve seen, Alison, right Dorothy? We’ve seen when the institutional investor community wants something, the market in corporate governance can change dramatically. And so I think if CEOs knew that it would be a level playing field, and that everybody would be similarly restricted, I think they would welcome it.
I think they just fear, Alison, unilateral disarmament in a situation where competitors are not disarming.
ALISON BEARD: And short of stopping, what does better, more principled political spending look like?
DOROTHY LUND: So I think, in our view, if your company is not willing to stop donations altogether, if you instead give through a PAC that’s raising money voluntarily, so that’s key, from your employees and shareholders without any coercion. And then there’s a real effort to make sure that this PAC is only giving to candidates that align with the company’s values. So this is a project for management. They need to do the research in the first instance, and really monitor the giving over time and see how these candidates, their views are evolving, et cetera. As Leo mentioned, it doesn’t make sense to give to political party committees, because it’s just too complex to oversee, to understand where those dollars are going. And that, to us, would be better than second best I guess.
And if you weren’t willing to do that, and you want to keep making those treasury expenditures, I think there’s a lot more that needs to be done to keep this legitimate and to avoid risk. That would involve, as we’ve talked about a little bit, the Jack Bogle idea, which is, create a political spending plan and have it approved by your shareholders, ideally a super majority of your shareholders.
And again, getting management really involved in the implementation here, having a committee of independent directors that develop company policies regarding the spending, they supervise this, review it, everything should be disclosed. So, there are a lot of good changes that companies can make if they want to continue giving to improve the legitimacy of what they’re up to and to reduce their risk.
ALISON BEARD: But understand that all that time and energy you’re spending on that is time and energy that you’re taking away from improving your business.
LEO STRINE: Exactly. And I think part of what Dorothy and I would say is not just improving your business, but actually as a business, living up to your stated values.
ALISON BEARD: Yeah. Terrific. Well, hopefully we can make some progress on this front. Leo, Dorothy, thank you so much for coming on the show.
LEO STRINE: Great to be with you.
DOROTHY LUND: Thanks for having us.
ALISON BEARD: That’s Dorothy Lund, an associate professor of law, the University of Southern California, and Leo Strine Jr., counsel at the law firm of Wachtell, Lipton, Rosen & Katz, distinguished fellow at the University of Pennsylvania’s Carey Law School, and former Chief Justice of the Supreme Court of Delaware. You can find their article in the January, February issue of HBR or on hbr.org.
If you liked this episode and want to hear more, like my conversation with Ella Washington on how corporate America should fight racism, you can find us wherever you listen to podcasts. This episode was produced by Mary Dew. We get technical help from Rob Eckhardt. Thanks for listening to the HBR IdeaCast. I’m Alison Beard.