October 17, 2010

Schleicher: The Parable of the Fox and the Target

[I have asked election law prof David Schleicher to write a series of guests posts related to election law issues in the 2010 elections. There should be one each week before the election. Here's the first.--RH]

First, I'd like to thank Rick for inviting me to write this column about the 2010 elections. One of the great things about this election season has been the availability of blogs by political scientists and statisticians (like the indispensible group blog The Monkey Cage, Seth Masket's Enik Rising, Brendan Nyhan's blog, and of course, Five Thirty Eight) to provide better guidance about what actually effects voting patterns and what is just journalistic noise. Election law scholars blog both pretty frequently and insightfully, I think -- not only Rick, Justin and Dan here, but Rick Pildes, Heather Gerken, Michael Kang and the people at Moritz among a number of others --- but we have not as a group spent too much time using the medium to address the big election law issues implicated by the 2010 elections. So I thought I would give it a go. I'm going to write three columns: Today's is about campaign finance; next week's column will be about election law and party polarization; my final column will discuss the failures of primary elections and urban politics through the lens of the D.C. Mayoral race.


Virtually everyone who thinks about election law has said something about Citizens United. This discussion has focused both on normative questions, like the basic question of whether the Court should have made such a sweeping decision, and on whole series of positive questions about the decision's likely effects, including efforts to determine how much corporate money will be spent in this election cycle, whether Citizens United caused any increase, and to whom the benefits of increased spending have run.

But there has been little focus on the most basic question one might ask about Citizens United: Who is going to change their behavior following the decision?

The answer to this question might seem obvious -- Citizens United eliminated restrictions on independent expenditures by corporations and unions and therefore they are the entities who will change their behavior. But corporations and unions are not monolithic. Some will spend money on politics; others will not. Before we can make predictions about the long-run effects of Citizens United on parties, candidates and public policy, we need to answer the question of which corporations and unions are likely to spend more (and differently) in elections.

One possible answer can be found in a story that took up a day or two of headlines during the 2010 election, in what one might call The Parable of the Fox and the Target.

Within days of one another, two major corporations, News Corp, the parent company of Fox, and Target got in a bit of hot water about their political spending. News Corp. gave $1M to the Republican Governors Association ("RGA") and Target gave $150K to Minnesota Forward, a group supporting Tom Emmer, a very conservative candidate for Governor in Minnesota who, among other things, supports a state constitutional amendment banning gay marriage. Both were criticized, but the reactions were very different. News Corp. was teased in the press for a day or two, but largely ignored the criticism, with Rupert Murdoch noting that he made the donation because he is friends with John Kasich, the Republican candidate for Governor of Ohio. Target was subject to a boycott led by LGBT groups and was forced to apologize.

Why did News Corp. largely escape criticism, and ignore what attacks came its way, while Target was both battered and cowed by the criticism it received for its much smaller amount of spending?

The answer, I think, lies in the ownership structure of the companies. And the difference between Fox and Target can tell us a great deal about which corporations are likely to spend money in politics. And, in turn, this can tell us a lot about the likely effects of Citizens United on the country and its politics.

Let's start with what can't explain the differences in the reaction. The difference can't be explained by differences in the accessibility of their products to potentially offended consumers. Although a boycott of Fox News by those offended by political donations to Republicans probably would not have been noticed (as they probably don't watch anyway) the donation came from News Corp., and Fox's popular shows like NFL football, House or Glee could have just as easily been boycotted as Target's stores. Nor can the groups to whom they gave money explain the difference -- both sent money through conduits and, even if Emmer is more radioactive for protestors than other candidates, it's at least plausible that more News Corp. money was allocated to Emmer's race than Target money (the RGA has spent more than $400K in the Minnesota's Governor's race.)

But corporate form helps us more. Target is a relatively ordinary corporation, and opposition to its political donations came not only from consumers, but also from its shareholders who were angry about the bad publicity and lost sales. Controversy over political spending was bad business, and so it was bad internal politics for executives. Although Target was willing to spend openly on politics at first, it probably won't do so again soon.

News Corp. is a very different kind of company, one in which Rupert Murdoch, through his family's control of a plurality of voting shares and dominance of the board of directors, is free to do things like owning the money-losing New York Post for years and years with seemingly no plan to make it anything other than a way to tweak Murdoch's rivals. Giving to the RGA doesn't appear to make much business sense for News Corp., at least in terms of earning credit from politicians and hence rents. After all, it's hard to imagine that there are any quid pro quo benefits the company could get from Republican Governors by spending money on their campaigns that it doesn't get by giving TV shows to former Republican governors or just by giving candidates or sitting governors lots of airtime on Fox News. It's not even clear that electing Republicans is good for the company's profit center, Fox News, as its ratings have increased since President Obama was elected.

But Murdoch is friends with John Kasich and so the money flowed out. There wasn't much protest because no one thought it would matter -- Rupert Murdoch made the decision and he has a pretty thick skin. In fact, News Corp. went ahead and gave another $250K to the RGA and $1M to the U.S. Chamber of Commerce. This eventually earned a small amount of pushback from News Corp. shareholders, but unlike the Target executives, Murdoch just shrugged it off.

This difference -- between firms that with strong shareholder oversight and those with weak oversight of executives --turns out to systematically predict which corporations spend heavily in politics. As shown by Aggarwal, Meshke and Wang, and more recently by John Coates, political spending correlates negatively with future returns -- companies that spend money in politics do worse in the future. According to Aggarwal et al, "an increase in donations of $10,000 is associated with a reduction in annual excess returns of 9.6 basis points." Similarly, Coates finds that "[p]olitical activity, in turn, is strongly negatively correlated with firm value." Spending money on politics isn't good for a company's bottom line.

But political spending probably isn't the cause of weak returns; it is more likely a symptom of factors inside the corporation that cause poor performance. Both Coates and Aggarawal et al. find that virtually every shareholder complaint about companies -- large boards, CEOs who chair the corporate board, abnormally high CEO compensation, weak shareholder rights, no large block ownership etc. -- turns out to correlate, and correlate strongly, with political spending. According to these studies, political spending is not for the most part an investment in getting policies that will favor the corporation; it is an agency cost or a way for executives to receive compensation.

In the traditional view of corporate political spending, a photograph at a fundraiser of a CEO embracing a politician is a memento of influence purchased for corporate interests. This evidence suggests that these photos are not a symbol of the purchase of a product but rather that the picture might be the product itself. Executives spend corporate money in politics as a form of consumption, to get pictures of themselves with politicians, and to support politicians for their own reasons, which may or may not be the same as those of the corporation. While it does not necessarily follow that limits on corporate spending will help shareholders (firms with bad managers may just spend the money on something else, like fancier offices) or that all political spending is against shareholder interests, we can say a number of things about the likely cumulative political effects of corporate campaign spending.

These studies suggest a different understanding of the effects of Citizen United (and WRTL). If Citizens United made corporate spending more likely, the money will come mostly from companies with empowered executives, slow growth and weak shareholder control, and not from innovative growing companies, who were more likely to invest in R&D or advertising or something else useful. If Citizens United made corporate spending more effective by permitting explicit campaign messages, the effect very well may be to support the preferences of executives, which are not necessarily the same as the interests of the corporations themselves. (For instance, if the Chamber of Commerce seems more jazzed about maintaining lower individual tax rates than it does about cutting corporate taxes directly, this can provide an explanation.)

Further, if this is right, corporate political spending ends up looking a lot like spending by very rich people, except that it ensures that there are more people who can behave like the very rich during campaign season. I'll leave it to you to spin out the normative stories -- I'll bet you can come up with a bunch -- but before we advance our opinions about the should, how much, and for whom questions about corporate campaign spending, we should focus a bit on the "who" question that precedes them. The Parable of the Fox and the Target may provide us with the beginnings of an answer.

--David Schleicher

Posted by Rick Hasen at October 17, 2010 12:31 PM