Lucian Bebchuk: Political spending must be transparent to public investors

A recent decision issued by the United States Supreme Court expanded the freedom of corporations to spend money on political campaigns and candidates - a freedom enjoyed by corporations in other countries around the world.

This raises well-known questions about democracy and private power, but another important question is often overlooked: who should decide for a publicly traded corporation whether to spend funds on politics, how much, and to what ends?

Under traditional corporate-law rules, the political-speech decisions of public companies are subject to the same rules as ordinary business decisions. Consequently, such decisions can be made without input from ordinary shareholders or independent directors, and without detailed disclosure - all safeguards that corporate law establishes for other managerial decisions, such as those concerning executive compensation or related-party transactions.

In a recent article, however, Robert Jackson and me argue political-speech decisions are fundamentally different from ordinary business decisions. The interests of directors, executives, and dominant shareholders with respect to such decisions may often diverge significantly from those of public investors.

Consider a public corporation whose chief executive or controlling shareholder supports a political movement to the country's right or left and wishes to support it with corporate funds. There is little reason to expect the political preferences of corporate insiders to mirror those of the public investors funding the company.

Furthermore, when such divergence of interest exists, using the corporation's funds to support political causes that the corporation's public investors do not favour - or even oppose - may well impose on them costs that exceed the monetary amounts spent. To prevent this, politicians should adopt safeguards for political spending decisions that would limit the divergence of such decisions from shareholder interests. For starters, it is important to require traded companies to provide detailed disclosure to public investors about the amounts and beneficiaries of any funds that the company spends, either directly or indirectly.

In expanding corporations' rights to spend money on politics, the US Supreme Court relied on "the processes of corporate democracy" to ensure that such spending does not deviate from shareholder interests.

Clearly, however, such processes can have little effect if political spending is not transparent to public investors. For such disclosure to be effective, it must include robust rules with respect to political spending via intermediaries.

• Lucian Bebchuk is Professor of Law, Economics and Finance, and Director of the Program on Corporate Governance at Harvard Law School.