Corporate Democracy from Say on Pay to Say on Politics

Abstract

The President of the Business Roundtable once infamously said that “corporations were never designed to be democracies…” American courts respectfully disagree and have repeatedly held that the democratic rights of shareholders are sacrosanct. The context for the Business Roundtable President’s comment was the battle over say on pay — a battle the Business Roundtable lost in the United States with the passage of the financial reform legislation known as Dodd-Frank.

As I will explain in this piece, courts’ robust conception of corporate democracy rights for shareholders should protect both shareholders’ ability to have a say on pay and say on politics. Say on pay is the practice in United States, among other nations, of mandating a non-binding shareholder vote on executive compensation at publicly traded firms. A shareholders’ say on politics does not yet exist in America. But theoretically, just as say on pay mandates shareholder democracy in the case of executive remuneration, say on politics would require shareholders to vote on corporate political spending. Binding say on politics votes already exist in the U.K.

Critiques of say on pay and say on politics have been couched as constitutional objections based on either the Tenth or First Amendments of the U.S. Constitution. But at their heart, these objections seem less rooted in the text of the Constitution and more inspired by a cribbed conception of shareholders’ corporate voting rights. To untangle who has the stronger legal argument requires a review of how American courts have conceptualized “corporate democracy.” I conclude that as framed by key courts such as the U.S. Supreme Court, the D.C. Circuit Court of Appeals and the Delaware state courts, “corporate democracy” is a capacious enough concept to justify both shareholders’ say on pay and say on politics.

Keywords: Executive compensation, Citizens United, Corporate political activity, corporate political spending, Dodd-Frank, shareholder rights, shareholder democracy, shareholder voting, proxy, money in politics, campaign finance, corporate law, corporate governance, securities law, election law