Other People's Money: Corporations, Agency Costs, and Campaign Finance Law

This article offers a political history of the first major federal campaign finance law, the 1907 ban on corporate contributions to candidates. This law has been widely misunderstood by courts and scholars who contend that the corporate contribution ban was motivated primarily by progressive era fears of the excessive power and influence of big business. Challenging this prevailing wisdom, this article shows that concerns about excessive corporate power, while present, were matched if not exceed by a different conception of corporate political corruption. At the turn of the century, corporate political contributions were widely understood to be corrupt because they amounted to a misuse of other people's money: company executives were opportunistically misappropriating the owners' money to purchase legislation designed to immunize executives from the oversight of owners. In other words, corporate political corruption was also conceptualized as a problem of agency costs within firms. This agency costs story of corporate contributions was especially salient in the wake of the radical transformation in corporate law at the end of the nineteenth century that broadened managerial discretion, restricted traditional rights of owners, and paved the way for the separation of ownership from control. Moreover, the underlying campaign finance scandal that paved the way for adoption of the corporate contribution ban - the New York Life Insurance scandal - was one in which opportunism and misuse of other people's money was a paramount theme. As a result of this scandal, the various political partners in the coalition behind the Tillman Act were attracted to, and unified by, the other people's money theme. For Congress and President Roosevelt, partisanship, ideology, and self-interest were all better served by emphasizing other people's money instead of excessive corporate power. This other people's money definition of electoral corruption not only shaped the first federal regulation of corporate campaign activity, but ultimately defined the main channel through which almost all subsequent federal election laws pertaining to corporations would flow. Whereas legal scholars argue that corporations have been subject to special restrictions on their campaign activity due to a desire to restrain excessive corporate power - and thus are meant to further political equality - this article suggests that agency costs provides a better explanation of the trajectory and details of federal law pertaining to corporate involvement in elections. The prevailing tendency in federal campaign finance law on corporations has been to allow corporate involvement so long as firms organize their political activity to avoid agency costs. While other people's money began as a tool to limit corporate involvement in elections, the long reliance since on agency costs since has opened up new avenues of corporate influence - at the expense of political equality rather than in its service. Although we often think of corporate political corruption as business interests buying too much influence, this Article shows that agency costs has also played a formative role in the regulation of corporate politics and, indeed, has become a hidden cornerstone of campaign finance law.