Citizens United Decreases Governance Effectiveness in Both Government and Business

The challenge with Citizens United vs the Federal Election Commission (Library, 2010) is how to approach it. One can view it through the lens of ethics (Silver, 2014), through which it is a terrible decision. You could examine it from an empirical standpoint and, even given the limited time since it was decided, there’s already sufficient evidence to suggest it is (further) corrupting the electoral process in the United States (Spencer & Wood, 2014). One could also view it from a governance standpoint, examining whether it will increase or decrease the efficacy of boards over their corporations (Coates IV, 2012). Since the narrow definition of the role of the board it to increase corporate value, it is fairly straightforward to measure the effects of Citizen’s United and, according to Coates, it has been surprisingly negative.
The lens through which I want to address Citizens United is that of electoral and governance accountability: Does Citizens United increase or decrease the ability to hold our elected officials and our corporations accountable for their actions? I think, in spite of some commentators claims to the contrary (Bedford, 2010; Meyer, 2012), Citizens United exacerbated the already existing problem of what Monks calls “Drone Corporations,” (Monks, 2013) those in which ownership is too diffuse to apply any power over the Board and, consequently, instilling more power in the managerial class. By giving corporate executives even more unrestrained power to lobby, bribe, hire, and otherwise influence political decision-making, it allows them to continue to tip the scales away from workers and toward themselves, and takes away more of the influence of the electorate and puts it squarely in the hands of deep-pocketed business interests.
First, electoral accountability.  Citizens United essentially takes the previous legal fiction of corporate personhood and makes it a both metaphysical and legal fact. The decision gives corporations the power to anonymously spend unlimited amounts of money influencing the electoral process based on the First Amendment’s free speech guarantees.  The managerial class has done a very effective job of increasing the amount of money that goes into their pockets and decreasing worker pay over the last 30 years (McCall & Percheski, 2010). Through their destruction of/decrease in participation in unions and conducting race-to-the-bottom labor arbitrage, the rich have become richer and the poor, poorer. While money does not determine elections, in competitive, non-incumbency races, campaign contributions have a significant effect on a candidate’s chances of winning (Erikson & Palfrey, 1998) and it buys influence and access. Thus, with corporations having significantly more money than individuals, they will be able to significantly affect elections and elected representatives will feel most accountable to them for their continued support. Thus, Citizens United takes power away from actual people and decreases electoral accountability.
Nearly as concerning is the effect it has on accountability in corporate governance. While the problems of drone boards, interlocking directorates, powerful chairmen and passive/diffused investors, all of which serve to decrease the power of the shareholder and increase the power of the managerial class existed before Citizens United, the decision gives managers increased powers in the halls of government (Monks, 1913). An excellent example of the way this effects governance is through the activity of the Business Roundtable, an organization of CEOs of large (mostly drone) corporations in fighting all “say-on-pay” provisions of the Dodd-Frank act, as toothless and merely advisory as those provisions are. Thus, by giving managers even more power, effective governance becomes ever more difficult. The managerialism that has increased in the U.S. for the past three decades (Locke & Spender, 2011) seems likely to significantly increase as a result of Citizens United. Thus, both corporations and the government move further out of our democratic control.

Bedford, K. (2010). Citizens United v. FEC: The Constitutional Right That Big Corporations Should Have But Do Not Want. Harvard Journal of Law & Public Policy, 34(2), p639–661.
Coates IV, J. C. (2012). Corporate Politics, Governance, and Value Before and After Citizens United. Journal of Empirical Legal Studies, 9(4), 657–696. doi:10.1111/j.1740-1461.2012.01265.x
Erikson, R. S., & Palfrey, T. R. (1998). Campaign Spending and Incumbency: An Alternative Simultaneous Equations Approach. The Journal of Politics, 60(02), 355–373. doi:10.2307/2647913
Library, H. O. U. S. S. C. Citizens United v Federal Election Commission (2010).
Locke, R., & Spender, J.-C. (2011). Confronting Managerialism: How the Business Elite and Their Schools Threw Our Lives Out of Balance (Economic Controversies). London: Zed Books.
McCall, L., & Percheski, C. (2010). Income Inequality: New Trends and Research Directions. Annual Review of Sociology, 36(1), 329–347. doi:10.1146/annurev.soc.012809.102541
Meyer, J. M. (2012). The Real Error in Citizens United. Washington and Lee Law Review, 69(4), 2171–2232.
Monks, R. A. G. (2013). Citizens DisUnited: Passive Investors, Drone CEOs, and the Corporate Capture of the American Dream. Miniver Press.
Silver, D. (2014). Business Ethics After Citizens United: A Contractualist Analysis. Journal of Business Ethics, 127(January 2014), 385–397. doi:10.1007/s10551-013-2046-y
Spencer, D., & Wood, A. (2014). Citizens United, States Divided: An Empirical Analysis of Independent Political Spending. Indiana Law Journal, 89(1), 315–372.

Corporate Governance and Behavioural Ethics

There are two ideas that underlie most theories about corporate governance, and those reflect the assumptions of the classical economic theory of homo economicus, or economic man (or, more politically correctly, economic person). Economic man encapsulates two assumptions about human behaviour, i.e., that human beings always act in ways that are both rational and self-interested. While these assumptions are the bedrock of most classical and liberal economics, they have only recently begun to be tested empirically in the fields of behavioral economics and behavioral ethics. As I wrote in my 2011 article in Compliance and Ethics Professional, the empirical examination of rational self-interest has exposed some substantial faults in these assumptions. What has not yet happened, as far as I can see, is for these insights about human behaviour to be propogated to the study of corporate governance.

There are two primary theories of corporate governance, the shareholder/agency theory and the stakeholder theory. Each makes different moral assumptions about the purpose of the corporation and the ethical and practical responsibilities of the senior-most decision makers in the corporate structure, the board of directors. The agency theory is more representative of the Friedmanite view that the sole responsibility of the corporation is to maximise legal returns to shareholders. Stakeholder theory holds that society gives the corporation its license to operate and therefore there are other groups, or stakeholders, to whom are owed consideration in addition to shareholders. Examples of these stakeholders are customers, workers, suppliers, communities, and society at large as representative of common/societal goods, such as the environment.

What both both these theories have in common, however, is that they both view the actors within the corporate system as self-interested and rational. In fact, agency theory is a direct expression of the assumption of selfishness. It suggests that because management and ownership are separated, the agent (the manager) will be motivated to behave in his or her best interest, not in the best interest of the principle (the shareholders/owners). Without the assumption of selfishness, the principle/agent problem disappears (or is at least diluted). This in turn calls into question many of the incentives used to align shareholder interests with those of the management (stock options, restricted stock, and contingent bonus plans). Much of the research done into employee motivation suggests that, beyond a certain minimal level, compensation is one of the least effective motivators of employee performance. This thus provides an ex post facto indictment of the belief in the centrality of selfishness for corporate governance.

While stakeholder theory demotes the importance of self-consideration, it places a greater emphasis on rationality. In fact, it requires an assumption quite the reverse of selfishness, in that assumes that managers and/or corporate boards can place their own self-interest in abeyance and, without bias, consider the interest of other actors. Prominent researchers (Kahneman, Tenbrunesel, Messick) have empirically demonstrated several varieties of self-interested decision-making bias. Perhaps even more consequentially, these biases are usually unconscious and/or self-deceptive, so the decision-maker doesn’t know he or she acting in a self-interested way, even when the entire project of stakeholder consideration is to combat narrow self-interest.

The practical implication of the outdated assumptions of both agency and stakeholder theories is that there can be a substantial mismatch between the intentions of corporate board, the decisions that boards make, and subsequent behaviour of management. At the very least, new systems of remuneration and incentives need to be developed to align corporate direction with management activity. Additionally, when incorporating a stakeholder approach to corporate governance, it is important to verify the interests of other stakeholders with those stakeholders themselves as self-interest biases can yield incorrect assessments in this regard. There are considerable opportunities in both academic and practitioner realms for the development of new, comprehensive theories of corporate governance and practical frameworks to control for bias and diverse motivations.