Money Managers in the Middle: Seeing and Sanctioning Political Spending after Citizens United

In Citizens United, the Court reminded Congress that it could further regulate corporate political spending through enhanced disclaimer and disclosure requirements. Eight of the nine justices signed on to Part IV of the opinion, which made clear that mandating disclosure of spending would be permissible under the Constitution. Arguably, a second door was left open to regulate which individuals within the corporate governance structure may hold the power to decide how to spend corporate funds on political matters. Given that the procedures of corporate democracy include the federal securities laws and regulations, the Court thereby invited Congress and the Securities and Exchange Commission (“SEC”) to cure disclosure shortages and otherwise regulate through federal legislation and rulemaking in the area of corporate governance.Spotting these two openings, legal scholars, policy makers, and activists have put forward a variety of suggestions to regulate corporate political spending. These tend to fall into two broad categories: disclosure and consent. While providing shareholders the right to pre-approve spending through a binding management-proposed proxy resolution may seem like a promising idea, it has some limitations as a practical matter. In particular, the emphasis on shareholders depends on an outdated view of the corporation as an association of owners who are real people. By granting shareholders voting rights over political spending, power would not shift to the real individual investors who have their capital at risk. Nor would other stakeholders have a say. Instead, such a requirement would move authority from corporate managers to giant institutional investors. This is because more than 70% of the shares in the largest US public companies are held by institutional investors. This article focuses on the role shareholders are currently playing and the role they might play in the future if a “sanctioning” law such as the Shareholder Protection Act is enacted, as well as what the implications of such a law would be. In doing so, this article distinguishes between institutional shareholders and real human beings who directly own shares or own them indirectly via money manager intermediaries. After examining the past behavior of shareholders in the context of proxy voting on shareholder-initiated “show-me” resolutions, three conclusions are drawn. First, whether a shareholder “sanctioning” resolution regime, requiring a majority of outstanding shares pre-approve political spending, will result in the approval of managerial spending proposals depends upon the “votes” of a very small number of powerful money managers who have historically sided with corporate management. Second, if Congress gives effect to the premise that political speech rights attach most strongly to real people and not to non-human intermediaries, and if a majority of real people (or shares held by them) are required to affirmatively consent or opt-out, a considerable check on managerial political spending might result. And, third, even if a majority of individual people who own corporate shares are required to consent, ultimate investors, such as mutual fund owners or 401k plan participants will have no power to approve or opt out of political spending that conflicts with their viewpoints. As such, given that money is speech, these individuals whose money is being used without their notice or consent would continue to compelled to speak. To remedy this result, disclosure and consent should travel down the full intermediation chain where ultimate investors can see and sanction or oppose corporate political spending.