(CE Vol. 37, No. 6)
"New Era Looms for Shareholder Activism As
Corporations Gain More Rights as Persons"
The Supreme Court celebrated the New Year by dismantling the country’s campaign
finance law. In a fractious 5-4 decision on January 22 concerning Citizens United v. Federal
Election Commission, the high court swept away restrictions on the amount of money
corporations could spend to influence political campaigns through advertising or other
media, leaving decades of precedent in disarray.
Republicans called the decision a victory for free speech. Democrats called it a triumph of
the strong over the weak. President Barack Obama called it “a major victory for big oil, Wall
Street banks, health insurance companies and the other powerful interests that marshal their
power every day in Washington to drown out the voices of everyday Americans.”
The Historical Roots of Corporate Personhood
The court’s decision could magnify corporate power as well as increase the need for good
corporate governance to reduce political pressure on companies; some predict a rise in
shareholder activism as a counterbalance. But to fully grasp the implications of the current
decision, we need to break open the history books. The Supreme Court’s action was just
the most recent manifestation of an American legal premise with its earliest roots in the
aftermath of the Civil War: that corporations are persons entitled to individual rights. When
the court announced its campaign finance decision, one could imagine the late Roscoe Conkling chortling with glee.
Conkling was one of the most powerful and self-serving politicians in the 19th Century. He
was elected mayor of Utica, N.Y. before he was 30 and soon after was elected to the House
of Representatives, later becoming a senator. He fought anything that would dilute the power
of political patronage. As a member of the House Judiciary Committee he helped shape the
“Reconstruction amendments,” the 13th, 14th and 15th amendments to the Constitution.“ An amendment drawn up to protect freed slaves, who were among the most helpless
Americans, was instead used to give more power to corporations.”
On its surface, the 14th Amendment overturned the Supreme Court’s notorious Dred Scott
decision of 1857, which denied constitutional rights to American slaves or their descendents.
But Conkling worked to assure that the committee’s final wording of the amendment avoided
the usual legal term, “natural persons” and used the term “persons” instead, in the “due
process” clause: “No State shall make or enforce any law which shall abridge the privileges
or immunities of citizens of the United States; nor shall any State deprive any person of life,
liberty, or property, without due process of law; nor deny to any person within its jurisdiction
the equal protection of the laws.”
The reason why became clear in 1882, when Conkling, as an attorney for the railroad,
argued before the Supreme Court in San Mateo County v. Southern Pacific Railroad Co. that
“persons” applied to corporations, and claimed that the true intent of the Judiciary Committee
was to protect businesses from oppressive state laws. The court didn’t buy his reasoning.
But four years later, in County of Santa Clara (California) v. Southern Pacific Railroad, the
court clerk (and yet another railroad attorney) John Chandler Bancroft Davis, inserted into
the headnotes of the case a comment made by Supreme Court Chief Justice Morrison
Remick Waite before the hearing. In those comments, Waite stated that the court was of the
unanimous opinion that corporate “persons” were the equivalent of citizens.
The comment was not within the body of the case and carried no rule of law. But lawyers
arguing before the court treated the statement as though it was part of case law. So an
amendment drawn up to protect freed slaves, who were among the most helpless Americans,
was instead used to give more power to corporations. In the following few decades, of 307
subsequent cases on the 14th amendment, only 19 involved real human beings. All the rest
applied to companies wanting more power.
Thus began the legal evolution of corporations as people. The first law restricting corporate
money in elections passed in 1907; the Supreme Court’s campaign finance decision
broadening the rights of corporations does away with most such limitations. But corporations
are not just any people, said author, consumer advocate and former presidential candidate
Ralph Nader. “Of course, it’s crazy,” he said. “We cannot have equal justice between, say,
you and Exxon. That’s the whole point. They have privileges and immunities that we’ll never
have,” he said, pointing out that companies, unlike people, can live on for centuries.
A Ruling That Privileges Wealth
Martin Budd, retired chairman of the law firm of Day Pitney, said the campaign finance court
decision challenges ordinary people’s sense of fair play.
“Once you say corporations can advertise or participate in [political races], it gives certain
corporations powers that others don’t have. The ruling gives privileges to wealth, which
always raises questions of fairness. Many corporations can outspend even the richest
individuals as they have resources much greater than Bill Gates (Microsoft founder)– more
than $34 billion.”
But the view of corporations as people does have the balancing effect of imposing more
responsibility on them, Budd said. “One of the aspects of this is that corporations can be
convicted of crimes, although, of course, you can’t put them in jail. And they can’t commit
certain crimes, such as rape. But the fact that they can be convicted is another aspect of
them having rights.”
Corporations possessing the rights of persons “is part of settled law,” said Professor Stephen
Kay of the University of Connecticut School of Law. “It’s not the case that corporations have
been running amok without anyone paying attention.” And, if they overstep, the solution is
obvious: “The fact that they are protected by the 14th Amendment doesn’t mean that they
can’t be regulated. The court is deferential to lawmakers’ ability to regulate,” he said.
In an interview on MSNBC’s Rachel Maddow Show January 22, U.S. Rep. Barney Frank,
D-Mass., appeared to agree. In the House of Representatives, Frank is the chairman of the
House Financial Services Committee, which has the power to regulate corporations.
“This is a radical repudiation of dozens of laws passed by Congress,” he said of the
decision. “Corporations are not natural beings; they only exist by law. What we can do that
is constitutionally, I believe, unassailable, is to impose restrictions as a matter of corporate
law… We will begin a package of legislation that will have some restraints on this. No other
country that I am aware of, no other functioning democracy allows this unlimited corporate
spending in campaigns. We will draft the toughest possible constitutional legislation to
prevent the drowning of American democracy in corporate dollars. There is no other way to
say it.” Frank said.
Calling it the “Super Bowl of bad decisions,” Bob Edgar of Common Cause said, “There are
corporations in this country which are larger than nations, and we should not allow them to
unlock their treasuries…we should make contributions to campaigns fully transparent so we
will know who is funding elections. We need legislative remedies, quickly.”
Both the Senate and the House of Representatives have filed proposals that would, among
other things, force corporations to get shareholder approval before spending money
on political advertising. When the Court announced its decision, for example, Rep. Alan
Grayson, D-Fla., introduced H.R. 4487, “End the Hijacking of Shareholder Funds Act,” would
require the approval of a majority of a public company’s shareholders for any expenditure by
that company to influence public opinion on matters not related to the company’s products
The Importance of Transparenc y in Corporate Political Spending
The court case could also spark the use of corporate governance policies as corporations
seek to create a buffer between their bottom line and political allies who may demand everhigher
levels of campaign support. The Center for Political Accountability (CPA) filed two
amicus briefs in the Citizens United case along with the Wharton School’s Zicklin Center
for Business Ethics Research, arguing for the need for companies to disclose spending to
protect shareholder interests and prevent, for the lack of a better term, political shakedowns
(The court supported disclosure provisions by an 8-1 vote.)
In the wake of the court decision, CPA president Bruce Freed said the ruling will increase
the need for companies to have clear procedures for reviewing, approving and disclosing
political spending. “It’s imperative that companies protect themselves from the pressure to
give and from ill-considered political spending,” Freed said in the CPA’s January newsletter.
Shareholder Activism: a Check on Corporate Power
Another potential result: As a check on corporate power, and as its conscience, shareholder
activism could increase in the wake of the Citizens United case.
About 270 proposals regarding disclosure of political activity and policies related to lobbying
and political contributions were filed between 2004 until January 25 of this year, according to
RiskMetrics Group data. The average support for the proposals was in high 30% range last
year, Carol Bowie, head of the Governance Institute at RMG, told Compliance Week. She
told the publication she anticipates more shareholder proposals regarding corporate political
activity later this year.
“Shareholder activism may be one of the few ways to push back against corporations. How
does the general public raise its voice?” said Tim Smith, Senior Vice President of Walden
Asset Management’s Environment, Social and Governance Group, and a former Executive
Director of ICCR.
“The voice has been multiplied many times. There are scores of issues being addressed,”
he said. Thirty-nine years ago, when the Episcopal Church introduced the first shareholder
resolution against General Motors, asking that it pull out of South Africa, corporations didn’t
believe social responsibility was something they needed to address. “Now, we are seeing
a major change by many companies which are becoming responsive to a broader range
of stakeholders,” Smith said. And although such votes are not binding now, the SEC rules
governing such resolutions could change, putting more power in the hands of shareholders
and serving as a check on corporate power.
If all else fails, Nader believes a constitutional amendment – which he has proposed before,
to no avail – could be the only option to lessen the power of corporations. The constitutional
amendment would contain text stating that corporations are not persons and that they are
only entitled to statutory protections conferred by legislatures and through referendums.
There’s no question in Nader’s mind that the need is urgent. Rather, he said, “the question
is whether our democracy can live when real persons are subordinate to corporate
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