The U.S. Supreme Court handed down a groundbreaking decision in Citizens United v. Federal Election Commission on January 21, 2010. In summary, the Supreme Court ruled as unconstitutional the prohibition on corporations using their funds to pay for campaign advertisements regarding an issue or political candidate.1 Although the political and practical implications of this ruling to our society will be debated and analyzed for many years to come, the effect this will have on corporate America is immediate, specifically in regard to corporations and their boards, management, shareholders and corporate governance policies, practices and procedures.
This ruling and its elimination of the prohibition on corporate financed campaign ads has prompted broad reactionary statements by politicians and pundits in regard to making changes to the laws governing corporations’ charters (corporations are “persons” only in the sense that they are creations of statute, and the statutes may be changed).
Although Congress can legislate in regard to corporations whose stock is “publicly traded,” it is less clear that it can effect fundamental change to the internal governance of private corporations (corporations are creatures of a particular state’s statutes, and don’t, generally, have federal charters). However, we have seen, most recently through the Sarbanes Oxley Act, that the federal government can and does affect the behavior of publicly traded companies, and derivatively this can have spillover effects on private companies and nonprofits.
Arguably a corporation’s board will have the most influence on how the corporation spends money in political campaigns. It is likely that the political history and proclivities of individual directors may become an issue of disclosure and debate among shareholders in board elections, and it may come to be that third parties will attempt to influence board elections in ways they have not done before. This could include activism to place alternative candidates (with a different political ideology) on a corporation’s ballot, rather than the candidate placed in nomination by the board’s nominating committee. Directors with stronger leadership ability and experience may be supplanted by directors who “vote the party line,” with the effect of advancing a corporation’s (or its majority stockholders’) perceived political interests to the possible detriment of the corporation’s broader business interests. The significance and profile of chief governance officers, corporate secretaries and investor relations personnel may also have been indirectly enhanced by this ruling, as they may now be called upon to assist boards in conducting real political “campaigns” to advance their corporation’s interests.
This should not all be viewed as uncharted territory, however, as many corporations already have established political action committees (PACs), and others have formal policies in place regarding their existing political spending. Many corporations have adopted written political contributions policies and have addressed political spending in their written business codes of conduct. Virtually every business will need to dust off those policies and codes, however, and reconsider and possibly revise them in light of this new legal precedent. These policies and codes will also need to remain top of mind as the implications of this ruling continue to unfold and evolve in the immediate future.
There will also likely be initiatives and actions by the various states in considering, and possibly making, revisions to their particular corporate statutes in light of this changing field (e.g., requiring a shareholder vote, rather than only board action, to authorize political spending). There will likely be some states that adopt pro-political spending corporate statute revisions, with others adopting anti-political spending statute revisions; these could even result in migration of corporate formations and re-chartering to or from particular states as a result.
The existing circumstances afford a unique opportunity for crafting and documenting an appropriate plan of internal controls and related strategies for businesses and their political activities.
Although it is difficult to say where these matters will come to rest, it will certainly be an interesting ride for the foreseeable future.
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1 Note: corporations continue to be prohibited from making direct political contributions to candidates or political parties.
For More Information
If you would like more information on this ruling and its possible effects and implications, please contact Bill Quick at wquick@polsinelli.com or (816) 360-4335.
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