CAMBRIDGE – The United States Supreme court recently struck down limits on the freedom of companies to spend money on political elections. Large, publicly traded companies in other countries also often face lax limits on their use of corporate resources to influence political outcomes, fueling fears that the interests of shareholders will trump those of other groups, such as consumers and employees. But corporate spending on politics can also hurt the interests of shareholders.
Stock market listed companies control a big share of almost every country’s resources, so the free flow of corporate money into politics can have a profound impact on politicians’ preferences and choices. In particular, the influence of corporations on politicians and political outcomes can be expected to weaken the rules that protect shareholders and ensure that companies are well-governed.
To understand why, it is important to focus on the individuals who make decisions for companies. When corporations decide which politicians to support, what kind of messages to send, and which political outcomes to seek, their general investors are not consulted. Rather, such decisions are likely to reflect the preferences and objectives of the insiders who manage the companies, ostensibly on shareholders’ behalf. And politicians that benefit from corporate spending and access to corporate resources will have an interest in serving the insiders’ preferences and objectives.
To be sure, on many issues the interests of corporate insiders overlap with those of investors, and here insiders can be expected to lobby in directions that are consistent with the interests of shareholders. But there are also important issues on which the interests of insiders and outside investors can sharply diverge. This is clearly the case with respect to the rules which govern investor protection and corporate governance.