05/16/2010 05:12 am ET Updated May 25, 2011

Restoring Democracy After Citizens United

In Citizens United v. FEC, five members of the Supreme Court granted business corporations First Amendment rights on the ground that corporations are "associations of citizens," that corporate money is speech, and that restrictions on corporate electioneering are a form of censorship. This reasoning is stunning in its disregard of the realities of politics and the foundations of corporate law.

In fact, large corporations are not associations of citizens, or even of human beings. The actual humans associated with our multi-national corporations are unlikely to all be citizens. But more to the point, they are employees, with no membership rights whatsoever under standard corporate law. Outside of some university faculties, employees don't elect their bosses, and even in the universities, they have no vote for the board of directors.

Corporate law is quite clear: directors are elected by the shares, on a basis of one share one vote. Shares are not citizens; they are legally defined bundled of rights. In the modern economy, most of them are held and voted by institutions, not human beings. The actual people who decide how to vote the shares are, by and large, fiduciaries under legal obligation and intense market pressure to use their votes in order to maximize share value, without regard to any other value that a citizen might care about. In the case of our largest shareholders, the pension funds, the voters are under a legal obligation to ignore even the actual financial interests of the human beings behind the fund: they are supposed to act on behalf of a purely imaginary beneficiary who is always on the edge of retirement, with no loyalty to the firm, its neighbors or the countries in which they operate. They are specifically barred by law from considering the possibility that young pension beneficiaries (or older ones with children or a sense of social solidarity) might care more about job quality or job security today than about maximizing the size of a pension sometime in the distant future. Even when the law does not force these fiduciaries to work for a purely imaginary legal construct instead of representing real people in all their complexity, the market does. Any mutual fund manager who sought to learn, let alone vote in accordance with, the actual values of her customers would necessarily underperform the market and quickly be out of business.

The corporate system is designed to suppress, not reflect, the full complexity of actual citizens' values and commitments. Real people generally like their stock prices to go up and the corporations they work for to make money, but they have many other, and more important, values as well. All those other values -- justice, decency, patriotism, getting home to see your children, survival of the species, beauty and humor -- drop out in internal corporate decision -- making as our laws structure it.

The Citizens United decision, then, is very wrong. But it can easily be fixed. All that is required is a statute that demands that politically active corporations in fact be what Justice Kennedy's myth claims they are: associations of citizens.

Like any association of citizens in a democratic society, politically active corporations should meet minimally democratic standards. That is, they should make their decisions by democratic voting (direct or indirect). Or, if they are not going to be democratic, at least they should be funded entirely by voluntary contributions, so that contributors can control them by withholding support. That's not democratic -- it's one vote per dollar, not per person -- but at least it gives the donors control.

At the Federal level, to correct the problem for the whole country, the following Amendment to the '34 Securities Act would do it.

1. All corporations subject to the Act shall disclose all expenditures made with intent to influence any election, referendum, or the content or enforcement of any statute, regulation or governmental action ("Electioneering/Lobbying Expenditures").

a. All such disclosures shall include the source from which the corporation obtained the funds used for Electioneering/Lobbying Expenditures.

b. If the source of Electioneering/Lobbying Expenditures is general treasury funds or other corporate property which could be converted into general treasury funds, the corporation shall further disclose the source of such funds, including its best estimate of (i) which corporate participant(s) or role(s) are the ultimate source of the funds and (ii) which corporate participants would be likely to receive them if they were not used for Electioneering/Lobbying Expenditures.

c. All such disclosures shall detail the positions or candidates or governmental action for or against which the corporation advocated and its rationale for believing that such advocacy or positions were in the corporate interest.

d. False or misleading disclosure shall be subject to the criminal and civil sanctions of the Act, including section 10(b).

2. Any corporations subject to the Act may make Electioneering/Lobbying Expenditures from corporate treasury funds. The corporations shall decide whether to make such expenditures and what position to take as a corporation by following the procedures of this Clause 2.

a. Only the corporation's board of directors or its express delegates may initiate the process for approving an Electioneering/Lobbying Expenditure under this Clause 2.

b. Any human being affiliated with a corporation subject to the Act shall have a right to speak in favor of, or in opposition to, any proposed Electioneering/Lobbying Expenditure. The corporation shall pay reasonable costs associated with disseminating such speech to other corporate affiliates. No person shall be disciplined, fired or otherwise retaliated against for exercising her or his right to speak under this sub-clause.

c. All proposals for the corporation to incur Electioneering/Lobbying Expenditures must be approved by a process satisfying ordinary democratic norms, including, at a minimum, direct approval by majority vote of the Affected Individuals on a one-person-one-vote basis, or indirect approval by representatives elected by such a vote.

d. Affected Individuals shall include investors, employees, suppliers and customers who have contributed towards the funds used, purchased goods at above the corporation's costs (not taking into account any Electioneering/Lobbying Expenditures) or sold labor, goods or services to the corporation for less than the corporation could have paid (not taking into account any Electioneering/Lobbying Expenditures).

e. The corporation shall bear the burden of proof to demonstrate effective, universal enfranchisement of Affected Individuals.

f. Any corporation with a board of directors the majority of the voting members of which are elected by employees on a one person one vote basis shall be exempt from sub-clauses c and d.

3. Any corporation funded only by contributions directly from human beings acting in their individual capacities (a Political Corporation) is exempt from Clause 2, provided that it receives no material part of its budget from sale of goods or services, investment income or contributions from entities or non-citizens.

4. Any corporation subject to Clause 2 may create a Political Corporation to accept contributions from such of its affiliates (defined as affected individuals under clause 2) as may choose to participate. The costs of creating and administering the Political Corporation may be assumed by the creating corporation and, if provided in kind with no cash component, shall not be deemed a contribution to the Political Corporation.

Clause 1 is a disclosure requirement, the central focus of the securities laws. It provides that those whose money enriched the corporation should know what use the corporation made of it. It is likely to have some shaming effect on corporations, particularly with respect to relatively controversial lobbying exercises.

Clause 2 makes clear that any corporation may participate fully in the democratic debate (satisfying Bellotti and Citizens Union) providing that it uses democratically legitimate internal decision making processes. Few business corporations would choose to avail themselves of clause 2, because most business corporations are not run along democratic lines and would not choose to introduce internal democracy.

In contrast, clauses 3 and 4 provide a simple alternative, modeled on existing PAC law, to fully protect the ability of managers, employees and investors to use their connections in the corporation for collective action. Note that Political Corporations ordinarily would not be subject to the Act, or, therefore, to the disclosure requirements of Clause 1. To the extent that corporate affiliates have genuine desires to take collective political action, the Political Corporation route protects them, even accepting the equality of dollars reasoning of Buckley v. Valeo.

The following is a similar statute designed to be enacted at the state level as an amendment to the State Business Corporation Act.

1. Every corporation is free to make expenditures to influence elections, educate the public on matters of public concern, affect or influence governmental decision-making or otherwise affect the political process in this State, or to affect the statutes, rules or regulations governing corporate behavior ("Political Action").

2. Decisions regarding Political Action are among the most important and controversial actions a corporation can take, implicating the values and interests of all corporate participants. Accordingly, each corporate decision regarding a Political Action which is made in this State or would have a substantial or significant affect on the political process in this State must be approved by a majority vote of every human corporate Stakeholder who is a US citizen and might be affected by the decision or expenditure.

3. Stakeholders shall presumptively include directors, managers, employees, human investors (or the human beneficiaries of institutional investors), customers, suppliers and taxpayers who might have to pay additional taxes as a direct or indirect consequence of such decision, unless the corporation establishes, by a preponderance of the evidence, that such individuals are not significantly affected by the corporate expenditure or any election or governmental action such expenditures may affect.

4. Stakeholders may delegate this decision to elected representatives, including the board of directors of a corporation, so long as those representatives are elected on a fair basis according to ordinary democratic norms, including but not limited to one human one vote, limited terms of office, and enfranchisement of all adult humans who are seriously affected by the representatives' actions.

5. This statute shall apply to every corporation incorporated in this State.

6. Any foreign corporation is free to make expenditures designed to influence elections or governmental actions in this state provided that it does so by means of a subsidiary incorporated in this state and complying with this statute. No foreign corporation shall be granted a license to do business in this state unless it agrees that all Political Action it takes in this State shall be by means of a corporation, including a wholly owned subsidiary, that complies with Section 2 of this statute.

7. Section 2 of this statute shall not apply to any corporation that is funded solely by voluntary donations from human beings, and receives no income from endowment , investments, or sales of goods and services (a "Political Action Corporation").

8. Any business corporation may sponsor an affiliated Political Action Corporation. If such Political Action Corporation restricts contributions and membership to Stakeholders of the sponsoring business corporation, the sponsor may use general treasury funds to pay for the reasonable costs of creating and administering the affiliated Political Action Corporation.

This statute, which could be passed by any state to protect its own political processes, would permit business corporations to intervene in local politics freely so long as they do so via

(a) a locally incorporated membership organization governed by majority (human) vote or by a board elected by majority (human) vote, with membership open to all corporate stakeholders broadly defined, or

(b) a side-fund that is funded only by voluntary contributions, not endowment income or sale of goods or services. Section 7 is meant to track pre-Citizens United PAC law, allowing wealthy individuals to band together to increase their influence, and would leave any existing restrictions on PACs in place.

Other possible state statutory solutions include:

-- requiring any business, whether incorporated or not, that sells in the jurisdiction to provide an effective means for in-state customers to opt out of corporate electioneering/lobbying expenditures where ever made, including full disclosure and a system for receiving refunds.

This would give consumers the means of boycotting politically active corporations and most likely would create some economic pressure on corporations to avoid political activity. However, over time, corporations would probably learn that few citizens are likely to "opt-out" as increased disclosure makes corporate political activity seem more normal.

-- classifying lobbying and electioneering expenditures by business corporations as corporate waste.

This would make directors and executives who approve such expenditures personally liable unless the expenditure is approved by unanimous vote of the shareholders.

-- Amending the (state or federal) income tax statute to declare that all corporate lobbying and electioneering expenditures shall be deemed expenditures by the human beings who contributed the funds used. To facilitate tax reporting and paying, the corporation shall be required to (1) identify such persons on a quarterly basis, and (2) to disclose to each such person the total expenditures made in their name and the causes for which they made, and (3) to set out the basis on which the corporation allocated the expenditures to that individual. Each individual receiving such imputed income shall be required to report such income for tax purposes and allowed to deduct the associated expenditures to the same extent as if the individual had made them in his or her personal capacity.

Imputing the income to individuals and requiring them to report it on their income taxes would emphasize the Court's claim that the rights being protected here are individual rights. Moreover, courts are generally quite reluctant to interfere with the state's taxing authority, so framing the statute as an income tax provision would lessen the probability of a successful First Amendment challenge. This is an effective disclosure statute that, presumably, would cause a good deal of unhappiness among those who learn that "their" money was used in this way. For at least a while, shame would inhibit companies from discloseable spending.

--banning lobbying and electioneering by any business corporation using funds that are in any part contributed by a non-citizen investor, employee or customer. In the case of institutional investors, the institution is deemed to have the citizenship of each of its associated participants, looking through all institutions until a human being is reached.

Every publicly traded corporation has non-citizen investors, so in practical terms this is the same as an outright ban for any publicly traded corporation, but the Court seemed to leave this route open.

The proposals above are intended to mitigate the impact of Citizens United's holding that corporations have the same right as citizens to make campaign expenditures (and presumably spend money in other ways that the Court might characterize as "political speech"). They will not eliminate the excessive influence of wealth in our political system. Thus, they are not meant to overturn Buckley v. Valeo or to substitute for effective campaign finance law. Any corporation can simply transfer funds to human beings, who are then free to spend them, even collectively (Clause 3).

They do, however, mean that the Electioneering/Lobbying Expenditures will come from actual human beings who have made an actual decision to spend their own money -- not corporate money with no clear owner -- to support their own views or interests -- not interests that they believe they are legally or ethically required to promote as fiduciaries for the corporation regardless of their personal views.

In other words, it effectively reduces the power of corporate money and corporate speech, which is never free speech, without challenging the Buckley v. Valeo claim that money is speech and campaign spending /contributions are protected by the First Amendment. It protects the ability of the rich to use their own money, while protecting corporate fiduciaries from the obligation to promote positions they might not support as citizens or believe are in the national interest or further the public good.

From a campaign finance perspective, Citizens United is only a sideshow. The real problem is Buckley v. Valeo, which held that campaign spending is a form of "speech" and that "freedom of speech" means that we are barred from providing for fair restrictions on the distorting influence of wealth in democratic elections.

To overturn Buckley would require either a new Court or a constitutional amendment:

The Congress, and the states, shall have plenary power to regulate the financing of elections, the lobbying of legislatures, and attempts to influence the content or enforcement of any law, regulation or governmental action. This power shall include but not be limited to the power to set spending and contribution limits; to make any convenient distinctions between citizens and non-citizens or between citizens and entities or among types of entity; and to entirely bar business corporations and similar economic enterprises from such spending, contributions, lobbying or attempts to influence. Provided, however, that all such regulation shall be general in character and no such limit may be contingent on the views expressed by any such person or organization.

This text overturns Bellotti and Buckley and leaves campaign finance reform to the legislatures. It leaves plenty of room for legislatures to make elections undemocratic and unfair. However, I am skeptical that shifting power to the courts to decide what is fair will, on balance, lead to more fair results.

To restrain corporate constitutional rights more generally -- the goal of the misnamed "corporate personhood" movement -- requires reversing the Court's presumption that corporations are more like citizens than government: that like individual citizens, they need protection from the potentially overbearing power of the state, and that unlike the state, they are not power centers themselves. In fact, however, major corporations are, like the state, collective organizations with great power for good or ill and plenty of opportunities for abuse of that power. We need Freedom of Speech or Due Process rights against major corporations far more than they need such rights against us. The following Constitutional amendment makes clear that major corporations in fact pose the same threats of overreaching as the state itself.

Any corporation which employs more than 1000 employees, or which has any security issued, outstanding and held by more than 100 people, or which has annual revenue exceeding $10 million, shall be deemed a "state actor" for purposes of the Constitution and shall not be entitled to claim rights under this Constitution except to the extent that state agencies are.

This text reverses the presumption that public corporations are "private" and so not bound by the Constitution but entitled to claim rights under it against the government. Instead, it creates a presumption that the legislature may regulate public corporations much as it regulates other state agencies, such as the IRS or the EPA or municipal governments, and that human beings have the same rights against public corporations that they do against state actors such as the DMV or the municipal water company: minimum rights to due process, free speech, equal protection, privacy, non-discrimination and so on.

On first principles, characterizing corporations in this way should be within the common law police power of any state, or the Commerce Clause and XIV Amendment enforcement powers of the Congress. Corporations, after all, exist only by action of the state; they are not pre-legal beings with existences of their own. However, the notion of corporate constitutional rights is deeply embedded in the precedents; the Court may insist that a change of this degree be made by Constitutional amendment.