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Regulatory: Corporate Political Expenditures After Citizens United

This month's elections featured an avalanche of independent spending designed to persuade voters to support or oppose particular candidates. Anyone who lives in a state with one or more competitive races on the 2010 ballot witnessed the overwhelming number of campaign advertisements. The Sunlight Foundation estimates that more than $450 million was spent on these independent activities this year, not including money spent by the candidates themselves and by the political parties.

The influx of money can be attributed, in part, to the Supreme Court's January 2010 decision in Citizens United v. Federal Election Commission. A divided Court rejected a provision of federal law barring corporate expenditures for certain election activities, overturning decades of judicial precedent. The Court concluded, in short, that "the Government may not suppress political speech on the basis of the speaker's corporate identity."

As a result, corporations now have considerably more freedom to intervene in political campaigns. While they still may not contribute funds directly to federal candidates, or to candidates in many states, the Supreme Court now permits businesses to engage in a variety of other political activities. And for in-house counsel, these new opportunities present a range of legal, compliance and policy considerations.

Before Citizens United, for example, a corporation could not fund a public advertisement urging support for a candidate. Now, such communications are allowed, and a company may spend unlimited corporate funds on them.

Most companies, however, are hesitant to run political advertising themselves or take other direct action to support or oppose candidates. (Unions, on the other hand, have taken full advantage of Citizens United, running many ads in support of candidates this year.)

Instead, corporations are far more likely to contribute to independent groups, and the role and impact of such groups became the most significant campaign finance story of the 2010 elections.

These independent groups, many created in the wake of the Supreme Court's decision, aggregate contributions from businesses and individuals in order to sponsor advertising and engage in other political activities. Some are a new breed of "independent expenditure-only committee," also known as "Super PACs," while others are organized as 527 or 501(c)(4) organizations.

Direct or indirect political involvement can be an extremely useful resource in pursuing a business's public policy objectives. However, just because corporations have the right to be more politically active does not mean that doing so is always advisable.

In one case this year, a leading retailer was targeted for a boycott over a contribution made to an independent group that, in turn, supported a candidate who opposed gay rights. It did not matter to the company's critics that the business was just one of many to support the group, or that the group supported a number of candidates, or that the group maintained that it selected candidates based on fiscal, not social, policies.

Companies also face increasing demands to disclose publicly their own contributions. The Center for Political Accountability and institutional investors have stepped up efforts to pressure companies to report contributions, as well as to ensure board oversight of political expenditures.

Disclosure is a key issue because independent groups may or may not be required by law to report their contributions and expenditures, depending upon the type of group, the jurisdiction and the type of activity. Critics complain that in many cases, the donors may never be made publicly known. As a result, corporate support for independent political groups will be a growing focus of disclosure efforts, whether in Congress and statehouses, before the Federal Election Commission or in the annual meetings of corporations.

The challenge for corporate law departments is how to put in place compliance policies and procedures governing corporate political expenditures to guard against both legal and reputational harm. Citizens United removed many legal restrictions but also generated significant controversy, ensuring that corporate political expenditures will be scrutinized carefully.

For corporate counsel reviewing a proposed contribution or expenditure, it is not enough to confirm that it is permissible under the law. Additional vetting of the groups and candidates is crucial too, along with a careful weighing of the potential risks and benefits of the activity. And as the 2012 election cycle kicks off, now is the time for corporations to prepare for what promises to be another contentious election season.

[This is the first in a series of articles on the intersection of corporate compliance, lobbying, and political activities.]

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William H. Minor

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