Limitiations on Corporate Speech: Protection for Shareholders, or Abridgement of Expression?

This essay critiques the "shareholder protection" rationale for banning political speech by corporations, a rationale that applies regardless whether the speech occurs in connection with a political campaign. Proponents of this rationale contend that corporate expenditures on such speech constitute "theft" of shareholder assets to subsidize political expression by managers. These advocates also argue that any legitimate interest in corporate political expression can be served by allowing shareholders and other corporate stakeholders to contribute to so-called "segregated funds," which can in turn expend contributed funds on political expression. Expenditures by such funds, it is said, reflect "actual public support"for the views expressed. The essay takes issue with both elements of the shareholder protection argument. The claim that corporate political speech constitutes theft of shareholder property is shown to rest on a controversial "Berle and Means" view of the corporation. According to this model, managers are all-powerful "trustees" of shareholder assets, constrained only by whatever legal requirements courts and legislatures choose to impose. Given this assumption, failure to ban political speech by corporations empowers managers to expend shareholder property as they see fit, to further their personal political agendas. There is, however, a competing model of the corporation, one that treats such an entity as a nexus of voluntary contracts, whereby shareholders consent to managers' disposition of retained earnings, subject to background rules that prevent corporate waste and the like. Proponents of this conception contend that various market mechanisms constrain managers' conduct and thereby ensure that managers exercise their discretion in a manner that enhances shareholders' returns. Adoption of a nexus of contracts model of the corporation undermines the claim that corporate political speech always or even usually constitutes "theft" of shareholder assets. Moreover, even though speech by segregated funds reflects "actual public support" for the ideas expressed, such regulation nonetheless works a significant burden on high value political expression. Political speech is a collective good, and reliance upon voluntary contributions to produce this good will result in a sub-optimal quantity of speech, that is, a quantity lower than that which shareholders would choose to support in a world without transaction costs. As a result, a ban on corporate political speech that relegates shareholders to segregated funds burdens shareholders' ability to employ the corporate form to express their views. Casual observation suggests that a significant amount of corporate political speech does, in fact, further shareholder interests. Indeed, many scholars argue that corporations engage in too much profit-maximizing speech and seek to justify limitations on corporate expression on this basis alone. If market mechanisms do align the interests of shareholders and managers, then an outright ban on corporate political speech is not narrowly tailored to further a compelling state interest, as such a ban would interdict a significant quantity of speech that shareholders desire, speech that segregated funds might not produce. If, in fact, some such speech furthers the interests of managers instead of shareholders, states can employ the less restrictive alternative of traditional corporate law remedies to police such misconduct.