Too Close For Comfort

Based on research by Douglas A. Schuler, Nicolas M. Dahan and Michael Hadani

• Codes of conduct for corporate political activity involve a high degree of managerial discretion, which makes them vulnerable to abuse. 
• While government regulations require transparency and limit the methods corporations can use to influence policymakers, the rules are often vague or easily skirted. 
• Corporate spending on political activity has only increased since a 2010 Supreme Court ruling lifted limits on campaign contributions. 

Joseph Cassano was generous with his friends in Washington. The former AIG executive personally donated more than $10,000 to Connecticut Senator Chris Dodd, for example, when the lawmaker was chairman of the Senate Banking Committee.

But that amount is negligible when compared to the more than $180 billion in taxpayer money AIG later received as a bailout. As head of the insurance giant’s financial products division, Cassano appeared to topple the first domino in the global financial crisis of 2008, leading Vanity Fair to dub him “the man who crashed the world.”  

Cassano may have emerged as a clear villain in the 2008 meltdown, but a murkier issue is whether corporations and policymakers should be so closely intertwined in the first place. Corporate wining and dining of political figures is nothing new, of course, but it’s become more of a hot-button issue in recent years, thanks in part to high-profile scandals like AIG’s. 

Should corporations involve themselves in politics at all? And if so, how should corporate political activity be governed? These are the questions Rice Business Professor Douglas A. Schuler set out to answer in a recent journal article, co-authored with Nicolas M. Dahan at California State University, Monterey Bay and Michael Hadani of St. Mary’s College of California. 

The implications of corporate political activity are immense — especially following the Supreme Court’s 2010 Citizens United v. FEC decision, which eliminated limits on corporate campaign contributions as long as they were independent of a party or candidate. That ruling has resulted in corporate donations of millions of dollars to so-called PACs, or political action committees, since the ruling. 

Donations of this scale raise eyebrows — and more questions, Schuler and his team say. Do firms have a legitimate right to influence public policy? Is there a point where they become excessively influential? These questions underlie the viability of democracy as a whole, they argue. Some scholars believe that the disproportionate power of corporate interests can generate public decisions that undermine the common interest and can ultimately cause economic stagnation and the decline of nations. 

So what’s the solution? Do we need more government oversight of corporate political activity? The researchers point out that the U.S. has long had legal standards governing such activity, from the 1946 Federal Regulation of Lobbying Act to the 2007 Honest Leadership and Open Government Act, plus a host of court decisions over the years. The existing regulatory framework sets fundamental requirements of transparency and limits the methods corporations can use to influence policymakers. 

But these regulations may not go far enough, the authors caution. For one example, most of the safeguards operate only on the federal level. On the state level, regulations can be loose or vague — or strict but easily skirted, as the federal safeguards themselves can be. 

On the other hand, corporations could be expected to govern their own political activity. In fact, that’s what the majority opinion in Citizens United argues — that corporate political activities can and should be assessed and controlled by corporate boards. 

Most large firms have already created codes of conduct for governmental affairs. But putting those codes into practice involves a high degree of managerial discretion. And that, the authors say, creates a similarly high risk of abuses, as AIG’s misdeeds demonstrated. In addition, the process of influencing public policy encompasses a long and complex web of interactions: everything from campaign contributions to lobbying to public relations and grassroots campaigns. This makes it virtually impossible for shareholders and their boards to monitor political activity closely. 

Even if corporate boards and executives are able to monitor political activity, it’s more likely than not that they’ll have no idea what they’re looking at. In a 2001 survey of public affairs professionals at Fortune 100 firms, 77 percent said they believed their top executives had little understanding of the political environment and how it impacted their firms — a “dangerous state of ignorance,” according to the survey’s authors. 

Schuler and his colleagues concluded it was “highly doubtful” that most corporations would keep close enough tabs on their own political activities. The best chance of ensuring ethical levels of corporate political influence, they said, would be to require stricter government regulation, especially in making these activities transparent. 

Before the Citizens United decision made it easier for corporations to influence politics, corporate political activity was already problematic and prone to abuse, as crises like the AIG collapse made clear. Quoting John C. Coates, a law and economics professor at Harvard Law School, the authors concluded: “Shareholders were not able to protect themselves from misuse of corporate funds for political purposes prior to Citizens United, and the risk of such misuse has increased as a result of the decision.” 

Douglas A. Schuler is an associate professor of business and public policy in the Jones Graduate School of Business at Rice University.

To learn more, please see: Dahan, Nicolas M., Michael Hadani, and Douglas A. Schuler. 2013. The Governance Challenges of Corporate Political Activity. Business & Society 52 (3): 365-387.