Is Corporate Political Spending Bad for Business? If So, What Can Be Done? A Conversation with Hon. Leo E. Strine

Positive Mavericks, Institutions, Corporate political capture

On April 6th 2022, Preventable Surprises was pleased to joined forces with the Erb Institute’s Corporate Political Responsibility Taskforce (CPRT), 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.

The paper’s main arguments are summarized below. You can replay a video of the conversation here, or visit the Erb Institute’s web site for the most important take-aways and quotes from the dialogue.

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:

  1. 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.
  2. Hypocrisy Traps: Political spending heightens reputational risks and the potential to contradict commitments to employees, customers, investors and other stakeholders.
  3. Influence-Seeking: The ‘freedom’ to engage in election spending following Citizens United has exposed companies to greater pressure to contribute.
  4. 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.
  5. 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: 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.

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: 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.

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

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.

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: 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.

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.


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