Magazine article Regulation

Politics and the Business Corporation: Do Politicians Want Donations More Than Corporations Want to Give Them?

Magazine article Regulation

Politics and the Business Corporation: Do Politicians Want Donations More Than Corporations Want to Give Them?

Article excerpt

THE TILLMAN ACT OF 1907 MADE IT A crime for corporations to give financial "contributions" to federal political candidates. Today, the act bars not only direct "contributions" to a candidate's campaign, but also "independent expenditures" that are spent on behalf of a candidate but are not coordinated with the candidate. Corporations, in short, are barred from making "ham money" donations in federal elections. Roughly 30 states have similar rules for candidates for state office.

The vintage of those rules distinguishes them from the bulk of modern campaign finance law, most of which was enacted in the Watergate reforms of the 1970s. They are also distinguished by their severity. Except for the Tillman Act and its state law counterparts, since the landmark 1976 case Buckle), v. Valeo, the Supreme Court has regularly struck down outright bans on "independent expenditures" and "contributions."

Despite a century's worth of regulation, however, many believe that corporate political influence is still too great. Hence, one of the principal aims of the Bipartisan Campaign Reform Act of 2002 (BCRA) was to ban corporate "soft money" donations (i.e., heretofore unregulated donations to political parties). Sen. Russell Feingold (D-Wis.), one of the act's sponsors, explained that this would close one of "the biggest loopholes in the system."

But if corporate political power is potentially so dangerous, how did corporations come to be subject to all of this regulation in the first place? Why were they unable to lobby successfully against the rules? And while we are on the subject, is corporate political activity really so dangerous?


Critics usually offer two explanations for why corporate political activity needs to be regulated: Corporate donations unnaturally skew the political discourse, and corporate donations harm shareholders. Let us look at the merits of both of those explanations.

Special advantages The Supreme Court provided the leading articulation of the view that corporate political activity will skew the political discourse in the 1990 case Austin v. Michigan Chamber of Commerce. In Austin, the Court observed that the state grants corporations "special advantages" such as "limited liability, perpetual life, and favorable treatment of the accumulation and distribution of assets." Those "special advantages," in the Court's view, allow corporations to amass "immense aggregations of wealth ... that have little or no correlation to the public's support for the corporation's political ideas." Thus, the Court held that restrictions on corporate political activity are permissible to offset the "unique state-conferred corporate structure that facilitates the amassing of large treasuries."

Austin rests on the assumption that, without regulation, corporations would in fact deploy their "large treasuries" in politics in such force as to become a "corrosive and distorting" influence. But managers who divert corporate resources from profit-making activities to politics on such a grand level as to warrant the characterization "corrosive and distorting" will find their firm's "large treasur[y]" vanishing as the firm becomes less competitive in product and capital markets. And perpetual life cuts in precisely the opposite direction than the Court supposed--it solves the "last period" problem. As a class, managers must always consider tomorrow's product and capital market competition. Managers have numerous incentives not to trade their firm's future profitability for an election victory.

The logic behind the Court's limited liability analysis is likewise obscure. Limited liability does not shield the corporation itself from liability for its debts. It merely caps the shareholders' personal liability for corporate debts at the amount of their investment. To suppose that limited liability will help an incorporated firm amass a huge treasury for use in electoral campaigns is therefore to suppose investor irrationality. …

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