A University of Arkansas finance professor has analyzed a key British law on corporate funding of political parties and found that the law did not cause corporations to end political spending. However, the law did modify the spending behavior of some companies.
The research addresses the call in the United States for a shareholders protection act following the U.S. Supreme Court’s decision in Citizens United v. Federal Election Commission, which allows publicly traded corporations to use unlimited sums of money to fund political advertisements in federal election campaigns without disclosure or shareholder consent. Since the court’s decision, shareholder-rights advocates have worked to support federal and state legislation to protect their interests.
The 2000 and 2006 Amendments to Companies Act of the United Kingdom provides shareholders with the ability to consent or object to future corporate political spending and a disclosure system that requires companies to report political spending to shareholders in annual reports. It also requires political parties to report the source of their funding to the voting public through an electoral commission.
“Citizens United raises a host of legal and corporate governance challenges,” said Kathy Fogel, assistant professor in the Sam M. Walton College of Business. “First is the problem of using ‘other people’s money’ in politics, which may lead to the loss of shareholder value. Corporate managers may misrepresent shareholders’ voices and political inclinations without a process of voting and consent. Worse yet, spending corporate money in politics opens new doors for corporations to direct political outcomes with treasury funds, which creates many opportunities for corruption, such as management engaging in a money-for-political-favors exchange with future leaders.”
Fogel and Stetson University College of Law professor Ciara Torres-Spelliscy obtained data on corporate political spending from 1993 to 2010 by 1,233 British firms, 204 of which were publicly traded companies. The researchers were also given access to management proposals requesting shareholder voting on such expenditures. They found that the U.K. Companies Act had not deterred corporate political spending. Companies that sought approval of political budgets nearly always got them approved by shareholders.
However, the act did modify the spending behavior of some companies, the researchers discovered. Forty-nine companies in the study sample stopped spending on politics altogether, and political budgets sought by managers and approved by shareholders were typically modest, ranging from £50,000 to £100,000.
In addition, actual corporate political spending for publicly traded companies in the United Kingdom was far below the overall shareholder-authorized amounts. The researchers’ data also revealed that since the 2000 amendments, political spending appeared to have migrated from publicly traded companies to privately held companies over the past decade. Fogel said this last finding suggests an area in which authorization and disclosure laws may have applied pressure against political spending of shareholder money.
“We believe [American] shareholders need new protections from managers’ spending corporate money on politics,” Fogel said. “Implementing a U.K. Companies Act-styled disclosure requirement through U.S. securities laws or regulations is one way to achieve transparency for political spending by publicly traded corporations.”
The research was supported the Mark and Dayna Sutton Family Research Support Fund. The researchers have submitted the article for publication.
Kathy Fogel, assistant professor, finance
Matt McGowan, science and research communications officer