Is Corporate Political Spending Bad for Business? If So, What Can Be Done?

A Conversation with Hon. Leo E. Strine

On April 6th, the Erb Institute’s Corporate Political Responsibility Taskforce (CPRT) was pleased to joined forces with Preventable Surprises, American Promise and In This Together, for a conversation with Hon. Leo E. Strine, Jr., former Chief Justice of the Supreme Court of Delaware, and of counsel at the law firm of Wachtell, Lipton, Rosen & Katz, to explore his recent article, “Corporate Political Spending Is Bad Business” (Harvard Business Review, Jan-Feb, 2022) co-authored with Dorothy S. Lund, Associate Professor of Law, University of Southern California, Gould School of Law. 

We are pleased to share these highlights, including quotes from Chief Justice Strine and our co-hosts, Jeff Clements, President of American Promise and Bill Shireman, Co-founder of In This Together. Our conversation was introduced by Erb Faculty Director, Tom Lyon and Jerome Tagger, CEO of Preventable Surprises, and moderated by CPRT Director, Elizabeth Doty

Is political spending bad for business?

In debates over corporate political spending, business and shareholder interest are often counterposed against the interests of other stakeholders and society. Yet, in their recent HBR article, Leo E. Strine and Dorothy Lund argue that there is “no sound business justification for political spending,” and that, in fact, such spending greatly heightens corporate risk.  

Specifically, they contend that shareholders lose due to five issues: 

Legitimacy Problems: Companies’ ability to align contributions with diverse shareholder political views is suspect and bipartisan support from Americans who oppose corporate political spending is long-standing and growing. 

Leo Strine: Americans are fundamentally entitled to have different views about key political issues. That’s the magic, right? We come together to peaceably govern ourselves, but we’re allowed to disagree. And when you hold a bunch of people’s money, and it’s not because they agree and want to speak through you, then if you pursue one vision of the good, you’re almost by definition subordinating others. 

Leo Strine: There’s really no way to reconcile these issues, no way for a corporation to figure out legitimately how to give money. No one invests money in corporations as an expression of their political beliefs. Employers pick a fund family that employees do not control. They cannot exit without penalty for a long, long time.  Corporate boards are not particularly representative of the electorate. Mutual funds have money from Democrats, Republicans, and Independents – and more Americans are Independents than a member of either party.  Americans are fundamentally entitled to have different views about key political issues — it’s part of our freedom. That’s why it’s almost impossible for businesses. 

Hypocrisy Traps: Political spending heightens reputational risks and the potential to contradict commitments to employees, customers, investors and other stakeholders.  

Leo Strine: As you get more disclosure, you get more awareness of the problems I’m talking about, of being unable to reconcile all this even if you try.  For example, when you’re a telecom and you give to your committee, they’re not going to just vote on telecom and they may have views that really are quite inconsistent with your stated values. And when it comes out that you’re giving money to them, it can be embarrassing. When you are in that position, it’s very difficult to hold your head high and to walk forward in a way where you can say that you’re actually being true to your mission and that you’re not dishonoring some stakeholder.  

Leo Strine: I think Bruce Freed and others have pressed on disclosure because it starts to create an accountability dynamic. That’s better for companies and that helps the people in companies who would honestly like to get out of this sordid business. 

Influence-Seeking: The ‘freedom’ to engage in election spending following Citizens United has exposed companies to greater pressure to contribute. 

Leo Strine: Corporations loved the old rules, because if you could not say yes, no one would ask you. Part of what Citizens United did was open up businesses to being importuned by all comers.

Bill Shireman: Political contributions are not voluntary; they are coerced. They are part of the cost of doing business. They tend to slow innovation in the economy, which is fundamentally bad for business overall. And investors are beginning to realize just how much they’re holding us back. They’re actually generating an anti-corporate, anti-capitalist extreme movement, both on the left and the right.

Bill Shireman: This system is genuinely dangerous to corporations, even the large institutions, the big unions, and others that seem to benefit from the pay to play model. Many CEOs and other leaders want to stop it. But the message to the CEOs is that you’re not in charge of public policy. You go do your business. We will manage tax laws and rules to create a positive business environment, so you make lots of money. And we will protect you from extremists who want to take down corporations and capitalism itself. 

Portfolio Costs: Investors have legitimacy issues, as well, but they also bear the economic costs of “rent- seeking,” which transfers value from one company to another or externalizes costs to the rest of their portfolio, taxpayers, or society as a whole.

Leo Strine: Human beings are not just interested in the profitability of one company. They also breathe air, they consume products, and they often own proxies for the entire economy. They pay taxes and shifting costs from a corporation to society hits you in your taxes. So, a single corporation engaging in rent-seeking in the political process can make that company more profitable, but externalizes costs to the detriment of workers, consumers, or the environment. Or it can create the “risk of becoming Russia,” where people don’t compete on the quality of products and services, but they compete on rent-seeking. The sum total of each industry’s rent-seeking is actually a dead weight cost to real economic growth in America. The sum total of that is not a wealthier American economy over time. It’s one that’s skewed.

Leo Strine: If you look at the polls on restricting corporate political spending, it’s one of the few issues where there are super majorities of Americans — of Republicans, Independents and Democrats — all against it. Yet it can’t get on the floor. The Bogle bill… why is it not getting to the floor of the Senate? Ask yourself that. There are certain business interests, by the way, which don’t want these kinds of things, because they rely on the rent-seeking.

Weak Governance: Companies that spend heavily on politics perform poorly compared to those that don’t, as management is distracted from innovation and the core business. 

Leo Strine: Research suggests that companies that spend heavily on politics perform more poorly than others. For example, a study of corporate political activity in the form of lobbying and PAC spending by S&P 500 companies from 1998 to 2004 (conducted by John Coates, a Harvard professor who recently served as general counsel of the SEC) found that it was strongly and negatively related to company value. 

How did we get here?

The Chief Justice observed that corporations face these problems because they themselves asked for it. Business money has been poured into a lot of the causes that have gone after societal, environmental, and campaign finance regulation in recent decades. Then, he argues, with Citizens United, the Supreme Court took away the capacity of Congress and state legislatures to regulate campaign finance, based on a fundamental misunderstanding of corporate law. 

Leo Strine: So, one of the basic things from the very beginning is that corporations are a creature of society, and they only have the powers that are given to them.  From the start of so-called “general charter corporations,” people like Teddy Roosevelt focused on constraining corporate political spending because, by definition, corporations have a lot of money and they’re not representative of human beings. And so, the idea was to try to leave politics to society. 

Leo Strine: How would you monitor corporate political spending? It isn’t the sort of thing that you would ever think would be effectively governed by stockholders. And frankly, it never had to be. But Citizens United “discovered” a freedom of the corporation that no one before then understood to be true: that corporations are basically modes of association. That everyone buys a share and if you don’t want to do something, you can just exercise your powers to exit. That there’s this right of whoever’s in charge of the corporation to use any funds in the treasury for political purposes. And by the way, Congress, it’s a first amendment violation if you tell them no. 

Leo Strine: With unions, they said you could only give money that was specifically designated by a union member. And I would argue that labor unions are much more an expression of authentic association than buying a share of stock. 

What can be done? 

Chief Justice Strine argued that there are only two options for addressing the legitimacy problem and the hypocrisy traps it creates for companies: through corporate governance, and through legislation.  These were not viewed as either/or.   To start, he outlined three ways corporate governance could be used, including prohibiting spending, spending only through a PAC, or requiring shareholder approval.

Leo Strine: I think the best approach for a company is to just simply stop making expenditures out of the corporation. That doesn’t mean you don’t use your voice (or that your CEO can’t spend his or her own money), but you don’t use corporate dollars. If you have jobs in the community, you will be heard on the basis of that. 

Leo Strine: If you’re going to spend, go back to McCain-Feingold and work through a PAC: only spend money that you voluntarily raised.  But even then, you need to have a process for asking:  What are the things we’re really true to? We need to make sure that these folks that we give to, or the causes we give to, are consistent with all of our beliefs and that we’re not simply giving to rent-seek in our particular thing. 

Leo Strine: If a business is being coerced about political spending, they need to say, “Senator blank, you misunderstand who’s the constituent. I’m the constituent, and we have 10,000 jobs in the United States of America, and you work for our employees, not vice versa, and you will not intimidate us. And I am not afraid to speak about our conversation publicly.” If you want to be heard by governors, you don’t have to give to the RGA or DGA, you can give to the National Governors Association and foster bipartisan efforts.

Leo Strine: Third, you can require approval of the stockholders. Jack Bogle, founder of Vanguard, a legend and a genuine American who embodied our shared principles, reacted to Citizens United by suggesting a 75% vote be required for corporations to spend money on politics.  Why so high, Mr. Bogle? The answer is, no one gives money to these corporations because they share our political beliefs. Or we pretend that our investors have to have shared beliefs. That’s un-American. Do you think these votes are likely to win? He argued no, they’re probably not likely to win. And doesn’t that prove the point? 

Leo Strine: I have focused on corporate law because Congress is sort of out of the action, except as it helps with the constitutional amendment or the Bogle bill. Specifically, I’ve been pushing for index investors to use their voice, because they actually represent the rational investors, the people who are invested in the whole economy. And if we put them on the spot, they can shut this down because they really can’t reconcile the pressures they are under — and a lot of the companies would actually like it.

Co-host Jeff Clements, President of American Promise explained more about the legislative path via a constitutional amendment.

Jeff Clements: We have to do both, governance and legislation. We can’t leave business to solve this ourselves, because we can’t. We cannot fix this as a societal problem without a constitutional solution. And the only thing blocking that is our own sense that it’s hard.  But are we constitutionally capable of making rules around the use of money and elections — as every democratic society in the world other than ours says they can? Well, the answer has to be yes. The amendment is how we do it.  We’ve done 27 of them. Eight of those reversed Supreme Court mistakes.  22 states have formally passed resolutions.  This is not a political partisan thing; this is something hundreds of millions of Americans want to get done.

Jeff Clements: Fundamentally what an amendment does is reverse the disastrous mistakes the Supreme Court has made and empower the American people to make judgments about the boundary lines and the use of money in the political sphere. Our Constitution has always permitted laws to address corporate, union and individual spending in elections, so as to manage corruption risks and protect elections and representation from undue and concentrated economic influence. In recent years, the Supreme Court has struck down dozens of these anti-corruption laws with a new theory of unlimited money being equivalent to free speech. With the constitutional amendment we call the For Our Freedom Amendmentwe’d restore the ability to enact effective laws for regulating money in state and federal elections in ways that both protect free speech and representation for all Americans, as well as create a level playing field and sound business environment.  

Jeff Clements: The single best thing businesspeople could do is simply say, “We support a constitutional amendment. It’s hard, but it has to be done. I want it. I support it. Let’s do it.”  I don’t think businesspeople recognize that what they say publicly on this could make a difference.

Our co-host Bill Shireman, Co-founder of In This Together, explained how both of these strategies could be mobilized by citizens engaging brands, who could engage their supply chains. 

Bill Shireman: In This Together is an initiative of Democrats, Republicans, and Independents, and our operating theory is that people have a lot more power than we think we do. And if we use that power strategically, we can change these power dynamics.  

Bill Shireman: If we can recruit about a 5% share of the nation’s consumers and voters to work positively with retail and consumer brands to drive these changes, those brands have the capacity to create a market incentive for companies down the supply chain to get out of politics.  

Bill Shireman: And then in districts as well, a 5% share of the voters in Republican and Democratic parties can create the groundswell of support that can influence the Federalist society and others in the conservative legal community to take another look at issues like Citizens United. 

Closing thoughts

Ultimately,  the Chief Justice believes that companies should be responsible citizens — treating employees, the environment and stakeholders right — but should not become authoritarian or totalitarian, ostracizing their employees, customers or stockholders because they do not share political beliefs. 

Leo Strine: One of the reasons why we want to leave politics to human beings is because our customer base and our workforce represent the full range of American values and that’s to be respectful to you and the basic nature of a Republic — it requires us not to take sides. And to not misuse the trust that’s placed in us for very different reasons — for improper purposes. 

Leo Strine: I think calling on corporations to do too much is dangerous. Many of us spend more of our waking hours under our employer’s roof than we do with our families, and the idea that within that space there’s should be an orthodoxy is antithetical to the whole idea of our Republic. People have to earn a living.  Are we going to have red corporations and blue corporations? This doesn’t really work well for anybody, and it slows growth. 

Leo Strine: We actually want to leave it to the American people, the freedom to decide for themselves. We want business to focus on making money the right way –which is quality products and services, treating their workers well, treating the environment well — but leave politics and religion to the people who deserve to discuss those issues and who are entitled to have diverse views on them: the American people. 

Leo Strine: And, by the way, if the only way you can get heard is by pouring your money in, then think about what that means for our society.  And if the only way you’re succeeding is by people who really aren’t in states where you do anything, but they’re carrying water for you, that’s kind of creepy and weird.  

Leo Strine: If you align your corporate political practices in the way that I said and focus on being a good corporate citizen in the right way, you actually much more credibly walk the line. You’ll be under less demand as a business to speak out situationally.

Leo Strine: As you transition, if you’re a company, don’t pretend to be perfect. Indicate that it’s difficult for a company to contend in an environment like this. Declare your increased sensitivity: Current practices are really not aligned with all of our stakeholders, and we want to do better. And when we expose more information, we’re going to learn ways in which we fall short of the mark. That’s the journey we’re on, but we’re not pretending that we just woke up and we’re better than anyone.

Moving to action

At the close of the call, Chief Justice Strine closed with encouragement to get involved:

Leo Strine: It’s great to be in conversation with people who care so much about our society’s best ideals. I think there are so many great ideas here. I just hope you continue the good fight, because it’s really important to knitting our social fabric back together.

Each of our co-hosts outlined a set of high-impact, non-partisan next steps: 

About the authors: 

This summary was prepared by Elizabeth Doty, Director of the Erb Institute’s Corporate Political Responsibility Taskforce and Jerome Tagger, CEO of Preventable Surprises

As a University organization, the Erb Institute serves as a hub for thought leadership, convening diverse perspectives for productive discussion and debate. In that process, we adhere to a policy of strict non-partisanship, and do not support, endorse or advocate for any political party, candidate or legislation. All of the co-hosting organizations for this event were non-partisan, and together, invited those interested in constructive, non-partisan, principles-based discussion.

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