Corporate Governance and Campaign Finance: Citizens United v. FEC (The Need for Federal Intervention)(Part 2)

As discussed in the last paragraph, shareholder approval of campaign expenditures is not an adequate solution to the issue, at least from a corporate governance perspective.

Another possibility would be to place the authority to approve expenditures on the board of directors.  One might think that it is already there, but that is unlikely.  Most expenditure decisions are made by the CEO, not the board.  Moreover, Delaware, in interpreting fiduciary obligations, has not been willing to specify when a board must be informed of developments within the corporation.  Thus, the CEO likely has no duty to inform the board when the expenditures are made.

To the extent that federal law requires board approval, the state law fiduciary duty standards would make any such decision a formality.  The board has an obligation to act in the best interest of shareholdres, which ordinarily translates into profit maximization.  Expenditures during election cycles, while perhaps bad for the country, would often be good for profit maximization. 

More importantly, board decisions that come under the duty of loyalty are analyzed under a process standard.  In other words, if they do it right from a process perspective, they will not be overturned or result in liability (with waiver of liability provisions the belt and suspenders when it comes to liability).  In short, directors may actually be acting in the best interest of the CEO but the substance of the decision will not be subject to review.  In short, any approval of campaign expenditures, if accompanied by sufficient process, will be unreviewable under state law. 

Imposing on boards an obligation to approve campaign expenditures, therefore, must be accompanied by a change in the standard of review.  This would be straightforward. Federal law should provide that:

• boards of public companies (those registered under Section 12(g) of the Exchange Act and subject to periodic reporting requirements) must approve any campaign expenditures in advance and disclose the decision, the terms approved, and the basis for the decision;
• boards have the burden of showing the fairness of the decision, with fairness including a finding that the expenditures will not unnecessarily cause public harm to the election process; and
• shareholders can bring a derivative suit for a violation of this provision without first making demand on the board.

In short, the board would have a much higher standard for approving the campaign expenditures and would be more easily sued when they don't meet those standards.  This would likely have a salutary effect on the expenses.