Why corporate political spending should be a board prerogative

In defending the use of bylaws to limit corporate political spending, Jay Kesten claims that:

... authorizing shareholders to enact binding bylaws may improve discourse within the firm concerning the costs and benefits of corporate political activity.  When the board is required to negotiate, valuable information is shared among the interested parties.  When shareholders are more informed about the activities within their firms and the consequences of potential regulatory actions, they are likely better able to make reasoned decisions about the appropriate path forward.  And, such discourse may better inform the public concerning corporations’ political activities.

This is, of course, absurd. Public corporations do not have internal discourse. Most retail (and many institutional) investors are rationally apathetic. Boards generally do not bargain with shareholders (too many collective action problems, for one thing). To the extent boards interact with shareholders, they tend to be activists whose interests may well differ from those of the larger mass of shareholders. (I elaborate on these points in Corporate Governance after the Financial Crisis.

Second, shareholders have no right to make "reasoned decisions" about corporate political spending. The law in every state is clear that the business and affairs of the corporatiopn are to be conducted by the board of directors and the managers to whom the board delegates authority. Corporate law in this regard is a system of director primacy, not shareholder primacy. Shareholders have no more right to decide where the corporate spends its lobbying dollars than they do to decide where the corporation builds plants or what products the corporation makes. See, e.g., Paramount Commc'ns Inc. v. Time Inc., Nos. 10866, 10670 & 10935, 1989 WL 79880, at *30 (Del. Ch. July 14, 1989) (“That many, presumably most, shareholders would prefer the board to do otherwise than it has done does not, in the circumstances of a challenge to this type of transaction, in my opinion, afford a basis to interfere with the effectuation of the board's business judgment.”), aff'd, 571 A.2d 1140 (Del. 1990).

Put another way, the law recognizes that "Charitable contributions are made by a corporation in the exercise of discretion by the Board of Directors or proper officers, primarily for public relations purposes ...." Hotpoint, Inc. v. U.S., 117 F.Supp. 572 (CT.CL. 1954). Just so, political contributions are (and should remain) within the discretion of the board of directors to be used as they see fit to advance the corporation's interests.