Corporate Governance

Corporate Profits and Corporate Political Spending: Why Companies Care and Corporate Legal Academics Should Too

By Faith Stevelman

First, I applaud the Harvard Corporate Governance blog for posting the Cooper, Gulen & Ovtchinnikov paper on Corporate Political Contributions and Stock Returns. Documenting the ways that companies influence federal Congressional campaigns -- and hence shape the broader political and legal system to maximize corporate profit --  is a crucial endeavor if we are going to have a meaningful discussion of what we mean by "free markets." 

The professors' new paper, based on a sophisticated new data set of FEC-documented PAC contributions to Congressional campaigns (from 1979 to 2004) reveals positive abnormal stock returns correlating with these contributions by public companies. Obviously, the results attest to companies' powerful interest in shaping the national political environment in their favor: whether that influence is exerted in the area of financial (de)regulation, limits on shareholder lawsuits, the scope and shape of healthcare reform, climate change regulation or new standards for food and product safety.

But even as this new paper (soon to be published in the Journal of Finance) documents the ways that public companies' donations to Congressional elections positively influence corporate profits, it only captures a tiny part of the picture. Part of what makes corporate political spending so tough to understand and talk about convincingly is that there are so many forms of it, and in each case, fine distinctions between what is and is not legal.

Finally, there is a lot of corporate political spending which remains almostly entirely invisible. (I heard that Obama resisted allowing grand corporate expenditures at his Inaugural, no?) 

In addition to campaign contributions, we need to analyze corporate lobbying expenses and gifts to legislators, issue advocacy, issue-based litigation advocacy (e.g. the filing of amicus briefs in pro-business lawsuits, especially in Supreme Court cases), and gifts companies make to candidates' and sitting legislators' favorite charities - a practice which (though noted in a midJune USA Today article) is only barely recognized or studied, and is often legal. Witness the force that the U.S. Chamber of Commerce has become in shaping federal law.

Furthermore, as I've noted in my UCLA paper ("Pandora's Box: Managerial Discretion and the Problem of Corporate Philanthropy"), much corporate politicking can be effectuated via corporate contributions to nonprofits. In many cases, the nonprofits are even 501(c)(3) "charities" (especially educational organizations aka think tanks). Such corporate donations/payments max out at 5% of a public company's total profits -- consider what a ceiling that establishes! And there is no public disclosure requirement: neither at the company or the recipient's (fund's) side. Late Congressman Paul E. Gillmor (R- Ohio) had pressed for new disclosure of such corporate donations, but there wasn't much political support. Imagine that.

Faith Stevelman/Director, Center on Business Law & Policy/Professor of Law/New York Law School/57 Worth Street/New York, NY 10013/212.431.2197

Full post as published by The Race to the Bottom on August 20, 2009 (boomark / email).