Is There an Implicit Contract between Government and Business?
The Disclosure Regulation of Corporate Political Spending through the Nexus of Contract Lenses1
Wei Feng
Abstract
There is a tendency in the theory of the firm to justify corporate political donations in terms of its
personhood or citizenship — the complexity of rights and responsibilities corporations may hold as
individuals under the common law. Corporations now are required more frequently than the past years
to make information disclosures regarding this particular expenditure as a fulfilment of accountability
under the law. One of the aims of this paper is to reframe the nature of corporate political spending as
an implicit contract between the government and the corporation, and from that develop the optimal
disclosure policy required in this implicit contract. The corporation’s political activities are redefined
in order to recognize potential obstacles as well as consequences of the legislative procedure of this
mandatory disclosure. Based on reframing the theoretical analysis of corporate political spending, this
paper discusses a concrete set of problem surrounding the optimal disclosure policy, which aims at
balancing efficiency and sustainability of the binary implicit contract between government and
business. This theoretical analysis is expected to enhance the understanding of the mechanism of
government-business relationships and corresponding disclosure policies.
Key Words: Corporate Political Spending, Implicit Contract, Disclosure Regulation
1
For their thoughtful comments and suggestions, I would like to thank my supervisors, Prof Susan Watson and
Prof David Mayes. All errors that remain are mine.
1
I. Introduction
Whether the disclosure of corporate political spending should be mandated has been a disputed
issue2. With stakeholders becoming aware of the significantly increase amount of corporate political
spending, public listed companies have been put under the spotlight and asked to explain their
relationships with the government or government officials, in particular those involving financial
transactions. The obscurity of this information — whether the amount as well as the recipient is
disclosed by corporations leads to concerns not only about the potential problem of corruption or the
appearance of bribery, but also about the abuse of corporate funds invested by shareholders. Therefore
it has been suggested that the political spending of corporations should be added to the mandatory
disclosure list. This is to protect shareholders’ right to know, more importantly, potentially to require
the consent from shareholders for this particular spending.
However, for pending regulation, it is crucial to embark first on the analysis of potential
regulatory impact and risk assessment related to creating, amending or repealing primary legislation
or regulations before reaching any conclusions. Instead of focusing on the transparency, which is also
essential to the issue, this paper traces back to the nature of the corporation and further the discussion
from the perspective of the nexus of contract theory. In this paper, the argument will be placed in the
context of the firm’s existence as a nexus of contracts3, where the de facto corporate expenditures
spent on political issues without much public awareness will be considered as the fulfilment of
implicit contracts between the government and corporations. In addition to the terms of the terms of
contract between government and business, the optimal disclosure policy of the undeclared contract is
also a question deserving further analysis. To be more specific, whether the effect of declaration of
inferred clauses will be the initiative for legal evolution and how contracting parties interact to form
the mechanism, will be important questions to answer, not only for the understanding of disclosure
2
Bebchuk, L. A., & Jackson Jr, R. J. (2013). Shining light on corporate political spending. 101 Geo. L.J. 923967.
3
Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and
ownership structure. Journal of financial economics, 3(4), 305-360.
2
regulations of corporate political spending, but also for the understanding of the necessity and
conditions for implicit contracts to become explicit.
II. Review the Corporate Political Spending Disclosure
The nexus of contract theory considers the company as a single contracting party coordinating
different parties, internal stakeholders and external stakeholders, via a nexus of contracts which
governs the rights and obligations of all contracting parties within in the entity4. From the perspective
of this theory, a company’s legal personality is defined by and also comprised of a nexus of contracts.
Among all the binary contractual relations, the contract between company and government is the one
less explored, especially when compared with other contractual relations within the nexus.
The relationship between government and business has been a long standing research question,
though there are fewer studies investigating the connection as a contractual relationship, and even
fewer regarding the contents of the contract between government and business. By considering
information disclosed by corporations and the political parties/candidates or required by the market,
the rights and obligations of the binary parities in this contractual relationship are likely to observe,
even the implicit contract and its contents.
Furthermore, to look at this pending regulation in the long term, the dynamics of contractual
relations and the clarity of the contracts are happening in the changing context of the economic, social
and political environment. Following the analytical framework set by Christopher M Bruner5, the
influence of the implicit contracts and the disclosure on the inner structure of the corporation is
examined on the political foundation of corporate governance.
A. The Beginning of the Story: Firms as Nexus of Contracts
4
Kraakman, R. (2009). The anatomy of corporate law: a comparative and functional approach. Oxford
University Press.
5
Bruner, C. M. (2013). Corporate Governance in the Common-law World: The Political Foundations of
Shareholder Power. Cambridge University Press.
3
In 1976 Michael Jensen and William Meckling first developed the conception of the corporation
as a nexus of contracts6, which had been embraced in the prior new institutional economics, Ronald
Coase (Coase, 1937). Coase suggested that firms exist as more efficient organizations than the market
because they endogenize and miniaturize transaction costs7. Contracts reduce the cost of bargaining
by making it frequent, while also specifying mutually agreed – contingencies that might otherwise
cause the deal to break down. His followers (such as Jensen and Meckling, 1976; Myers, 19778) have
elaborated Coase’s notion that the firm as a “nexus of contracting relationships”. (See Figure 1)
Figure 1. The Firm as a Nexus of Contracting Relationship
Figure 1. Nexus of Contracts, source: Butler, H. N. (1988). Contractual theory of the corporation,
The. Geo. Mason UL Rev., 11, 99.
Among all relationships in the nexus, parties in binary contracts may have different objectives as
well as behaviour. Bonded by the contract, contracting parties will perform as the contract stipulates,
6
See Supra 2.
Coase, R. H. (1937). The nature of the firm. economica, 4(16), 386-405.
8
Myers, S. C. (1977). Determinants of corporate borrowing. Journal of financial economics, 5(2), 147-175;
7
4
knowing that otherwise they will face penalties for breaking it. Nevertheless, they will still be
motivated to advance their interests within the framework of contract by taking full advantage of
every chance that is explicitly allowed or implicitly not forbidden in the contract.
Such opportunities to advance the individual interest, which may conflict with or minimize the
common interest of all stakeholders, are more likely to emerge in complex and uncertain
environments. In such environments, according to the nexus of contract theory, it is usually the case
that the information possessed by the parties involved is asymmetrical and will be used by the
advantageous parties to improve their own interests. The business environment with political
participation can make an applicable example. Given the uncertainty and complexity of the external
environment, the public relationship, especially relationship with the government, can serve the
mutual goals of all stakeholders as it claims, or can be used to better the chances of politically
engaging individuals for their own future careers. As the advantaged party with private information,
executives in charge of political affairs may be able to use the asymmetry to favourably interpret (or
even to misrepresent) their actions to the principals.
The nexus of contract theory also suggest that this kind of information asymmetry can be reduced
by several corporate governance mechanisms, among which more elaborative contracts, more
effective supervision and more ex ante precautionary measure provided by the principals are usually
suggested9. Generally, the principle of all these governance mechanism is to limit opportunistic
behaviour and align shared goals.
In the nexus, the binary contract between the government and the corporations remains more
obscure then the others. One possible reason is to avoid a quick and thoughtless classification as
bribery, nepotism and cronyism. Other potential explanations may argue that the contractual
relationship is invalid due to the dominant position of the government. The inequality between the
two contractual parties has the chance to alter the nature of the contract. However, from the
perspective of rights and obligations, agreements between the two parties still can be established. The
9
Bukspan, E. (2005). The Notion of Trust as a Comprehensive Theory of Contract and Corporate Law: A New
Approach to the Conception that the Corporation Is a Nexus of Contract. bepress Legal Series, 493.
5
explicit contracts can be understood as laws govern corporations and their business activities, yet
between the government and the business organizations, the contractual relationship can be
discovered more than above.
B. Corporate Political Spending: the Implicit Contract between the Government and
Corporations
The contents of government-business relationship apart from what the law states is constituted by
a set of acquiescent agreement, which can be understood as an implicit contract. Based on the
definition, the implicit contract infers the informal contract based on the future values of relations
among the contracting parties. The major characteristic of implicit contract is self-enforcement, which
means transactions established by the contract are mainly accomplished by the self-coordination of
the contracting parties. For corporations from all industries, the achievement of objectives requires the
support from well-designed corporate governance. According to Zingales (1997)10, corporate
governance is a complex of constraints built by implicit contracts regarding bargaining around the
quasi-rent ex post, when corporate governance is a mechanism to resolve the problem of creation and
allocation of the rent. From this perspective , discussions under the framework of complete contract
theory appears to be unreasonable, because the complete contract theory assumes that all arrangement
can be made ex ante, which leaves no room for negotiations afterwards and hence no necessity for
corporate governance. In practice, explicit contracts under the framework of complete contracts are
not able to incorporate every detail of daily operations. Even if it could at a certain point, the
executory cost will keep increasing as contracts becoming more complicated. Yet explicit contracts in
practice are frequently formulated in vague expressions, which is partly because sometimes selfenforcement is more efficient than court-enforcement.
As the objectives of corporate governance, the effectual way to improve efficiency is to allocate
resources effectively. Industrial characteristics of the efficient allocation of resources require
coordination from the inner power of firms. Especially when the source of the power is coming from
10
Kaplan, S. N., & Zingales, L. (1997). Do investment-cash flow sensitivities provide useful measures of
financing constraints?. The Quarterly Journal of Economics, 112(1), 169-215.
6
the core resources attached to the managerial personnel, drafting a contract will engender the interest
of shareholders and cause more information asymmetry. Explicit contracts in corporate governance,
such as remuneration contracts, are hardly able to cover all possibilities. Therefore more discretionary
power is given to managerial personnel. On one hand, shareholders expect the enforcement of this
part of the power will bring more profit to the firm; on the other hand, they have concerns that this
power will cause failures in operations. The conflict between the efficiency and stability is reflected
on the design of corporate governance as the supervision and control of this discretionary power. This
role can be fulfilled by an implicit contract, the theoretical inference is based on the core resources.
First it enhances the bargaining power of the managerial staff with shareholders. Second, the fear of
loss of control over the key resource can effectively prevent their impulsion for opportunism. The
stability of the mechanism maintained by implicit contracts is depicted and realized by embedding
networks built by various games, while the corporate governance objectives can be achieved by the
influence exerted during the corporate contract design which involves the entire network.
From the perspective of the theory of nexus of contracts, corporations are the nexus of contracts
among all parties possessing productive factors: that is to say, a set of comprehensive societal
contracts coordinate all elemental capitals under the framework of sustainable objectives. On the
condition of investing capitals into the corporation, stakeholders assume that they have contingent
claims for corporate properties. These relationships are viewed from the firm as obligations to all
owners of productive factors, and it is not due to the firm’s generosity or enlightenment to undertake
such responsibilities, but the endogenous legal principle embedded in the contractual relationship.
To figure out the contents of the implicit contracts, it is also important to recognize that the scope
of productive factors, the content, formality and characteristics of corporate contracts are evolving
with the passage of time. Currently, the contracting elements of the firm include: financial capital,
human resources, social capital and ecological capital. First, financial capital is the most traditional
form of capital, such as equity and debt capital. Second, human resources incorporate physical,
intellectual, technical and emotional input of employees. Third, social capital includes legal
environment and social infrastructure provided by the government, mutual trust and relationship
7
among communities. Fourth, ecological capital covers natural environment and dynamic relationships
among species. Among all the nexus of contracts, there are dominant and implicit contracts, as well as
complete and incomplete contracts. For example, financial capital and the initial financial contract on
the establishment of the firm determine the capital structure and initial ownership, which is a
dominant as well as a complete contract. Meanwhile, the contracts between corporations and
government as well as the contracts between corporations and employees contain dominant and
implicit contents at the same time.
Specifically, the authoritativeness of the government and the compulsory feature of law
enforcement determine the dominant power of the government in the contracts between corporations
and the government. The government requires corporations to observe rules and obey the law, which
are the contents of the contract between corporations and the government. In this process, there is less
room for corporations to negotiate. Terms of the contracts stipulate explicitly that corporations shall
abide by the law and deliver taxes as required, which are complete and dominant for the contracts.
Only when corporations fulfil their responsibilities for the government, do they have the legitimate
ground of existence, which is one of the premises of the firm.
However, as time has passed, the political system as well as organizational structure of the
business has also changed. According to a recent Harris poll, many American citizens believe that big
companies (88%), Political Action Committees (PACs) (87%), banks (85%), financial institutions
(85%), political lobbyists (84%) and the new media (72%) are having excessive influence and power
in Washington D. C.11. The widespread public perception appears to be that business is now exerting a
significant influence on politics through campaign finance and lobbying activities. The role of money
on the form of campaign contribution is implicit. Seemingly, political contribution is considered
necessary for access to the political process, hence the exercise of effective influence on the political
dynamics.
11
The Harris Poll, April, 2011,
http://www.harrisinteractive.com/NewsRoom/HarrisPolls/tabid/447/mid/1508/articleId/790/ctl/ReadCustom%2
0Default/Default.aspx
8
Moreover, this latent de facto contract has not become explicit yet. There are numerous
arguments about the ethics regarding the political contributions from corporations, concerning this
conduct become a virtual quid pro quo. With the increasing uncertainty of external environment,
corporations have been making every possible effort to maximize the outcome expectations, including
participating in policy making process to ensure of favourable conditions for future development.
C. A Closer Look: The contents of the implicit contract between the business and the
government
Although the contents of the implicit contract between business and government seem
discretionary, it is still possible to grasp some beneficiary outcomes for the corporation from the
literature, which are “exchanged” by the efforts of developing political connections, including
corporate political spendings.
1. Profit monopolization
As commonly accepted in the dominant neoclassic framework, rent-seeking activities are
considered as one way to increase value under the firm’s objective of profit maximization. Companies
with better connections with politician in power obtain benefits through these rent-seeking activities,
which enable well-connected firms to derive competitive advantages via monopoly control of industry,
accessibility to funding and easy access to profitable projects subsidized by government budgets
which are under the control of a connected politician. Before the World War II, the economic model
of developing markets, such as Brazil, Mexico, India and few others depended heavily on politically
connected firms or state funded schemes for boost its economic development, yet few had succeeded
(see Woo 199812). Economic structures were malformed by such state intervention, especially where
its private sector was absent in the early stages.
Most modern societies impose strict rules to prevent conglomeration and also rules to promote
fair trading practices as antidotes to rent-seeking behaviour. In a purely competitive market, where
12
Woo, W.P. 1998. State Supported Programmes and Their Costs. Singapore: Mimeo Presented at the National
University of Singapore.
9
there is less ownership concentration in a firm and slight distortions in the economy, a firm that is
highly efficient with the lowest cost of production will sell its product at a market price and will earn
a normal profit13. In Krueger’s (1974)14 model, firms seeking rent try to create a market barrier, which
will create an artificial and monopoly market price for a product and hence earn a high profit margin.
In this way the firm can produce at levels that reduce consumer surplus and abnormal profits.
Meanwhile, governments, which are the regulators to ensure fair competition, could create firms
under their control or establish both legal (e.g., Golden, 1994) or related party connection to a firm
aimed at preventing fuller competition for a government-linked or political-group-controlled firm.
Hence, promotion of rent-seeking is a tunnel to create extra value by connected firms.
An answer for why such firms differ in terms of agency costs, ownership structure and control
mechanisms such firms use differ: Zingales and Dyck (2001)15 found controlling owners would keep
all benefits while costs are shared with other shareholders. Various means of control such as
concentration of ownership in the hands of the major shareholders, proxies and/or managers aligned to
the owners are becoming prevalent to control these benefits among politically connected firms.
2. Preferential Financing Access
A number of studies show firms connected to politicians have easier access to financing through
relationship-based connections to financial institutions, although the access has higher risk of default
during economic downturns. La Porta et al. (1999)16 and Rajan and Zingales (1998)17 documented that
well-connected firms can access to preferential financial conditions more easily. Related lending is on
more favourable terms than arms-length lending.
13
See supra 4.
Krueger, A. O. (1974). The political economy of the rent-seeking society. The American Economic Review,
vol(issue), 291-303.
15
Dyck, A., & Zingales, L. (2004). Private benefits of control: An international comparison. The Journal of
Finance, 59(2), 537-600.
16
La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. (2000). Investor protection and corporate
governance. Journal of Financial Economics, 58(1), 3-27.
17
Rajan, R. G., & Zingales, L. (1998). Which capitalism? Lessons from the East Asian crisis. Journal of
Applied Corporate Finance, 11(3), 40-48.
14
10
Election circle also affect the financing channel, for example, government banks increase lending
in election years compared to private banks, which reduces the political intervention costs before
elections. According to Khwaja and Mian (2004)18, Pakistani firms connected to politicians received
twice as much loans from government banks compared to unconnected firms. Irresponsible lending
weakens the lending banks, and increase transfer of wealth from debt-holders to shareholders.
Claessens, Djankov, and Lang (2000)19 trace this behaviour to politically connected financial
institutions being less prudent in loans.
Another issue regarding preferential financial aid is that government tend to bail out firms when
these firms are in financial distress (Ito, 1998)20. Malaysia bailed out 94 such firms in 1999.
Nonfinancial and financial firms being rescued for reasons of political connections introduces moral
hazard. Political connections play an important role in bail outs: an example is Silverado Finance in
the USA during the Credit Union debacle under Reagan presidency. Firms received sizeable loans
from the World Bank (1996)21 were mainly politically connected.
The continued practice of a relationship-based system will further entrench incumbent firms at
the expense of new entrants: Kali, Wiwattanakantang, and Charumilind (2001)22. According to Ariff
and Khalid (2005)23 banks in Thailand inclined to provide preferential access of long-term credits for
firms that are connected politically. Such banks were provided with implicit guarantee from
government, even the politically connected firms were included in the rescue plan, while the rescue of
such finance companies in May 1997 was the key reason for the following financial crisis.
3. Public images and market confidence
18
Khwaja, A. I., & Mian, A. (2005). Do lenders favor politically connected firms? Rent provision in an
emerging financial market. The Quarterly Journal of Economics, 120(4), 1371-1411.
19
Claessens, S., Djankov, S., & Xu, L. C. (2000). Corporate performance in the East Asian financial crisis. The
World Bank Research Observer, 15(1), 23-46.
20
Ito, T. (1998). Bail-Out, Moral Hazard, and Credibility. In Wharton conference on Asian Twin Financial
Crises, Tokyo (10 March).
21
Wang, Y., & Shilling, J. D. (1995). Managing capital flows in East Asia. Office of the Vice President, East
Asia and Pacific Region, the World Bank.
22
Charumilind, C., Kali, R., & Wiwattanakantang, Y. (2006). Connected Lending: Thailand before the Financial
Crisis. The Journal of Business, 79(1), 181-218.
23
Ariff, M., & Khalid, A. M. (2005). Liberalization and growth in Asia. Elgar: Town?.
11
If a firm is controlled by a political group, then it follows that corporate affairs of such firms are
more likely to be impacted by the influence of the political group(s) in control of the government.
Using Porta, Lopez-De-Silanes, and Shleifer (1999)24 argument that property rights or the law matters,
Claessens, Djankov, and Lang (2000)25 maintain that dissimilarity in result of behaviours from the
quality of investor protection due to the differences of legal environments. Politicians are perhaps the
best among influential groups who could provide greater degree of property protection to investor.
Recent literature suggests political connectedness of a firm provides value-enhancing benefits to firms.
It seems corporate decisions derive from different motivations, which are directly related to controls
exercised by large or other controlling shareholder(s) such as government nominees.
4. Job creations and elections
Bertrand, Duflo, and Mullainathan (2004)26 found that in France, CEOs of large publicly listed
firms with political connections make corporate decisions that potentially beneficial to politicians in
increasing the politicians’ re-election chances, while firms aim to strengthen political connections.
Aggregate cooperation conditions are of great importance to voters when making decisions whether to
elect an incumbent official. The economic favours extended by connected CEOs to politicians are
reciprocated in terms of average lower tax payments and increase in subsidies received. Incumbent
governments using economic policy tools could affect election outcomes (Ito 1998)27.
The above listed preferential conditions usually do not come in vain. To be well-connected with
government, firms have to either give up certain part of ownership (e.g. SOEs) or make financial
endeavour to develop such tie, which potentially will bring the additional benefit for the firms. The
provision of this implicit contract are well accepted yet not specified, for which the establishment and
effectuation of the contract is separated. It is assumed that the implicit contract is established once the
24
Porta, R., Lopez‐de‐Silanes, F., & Shleifer, A. (1999). Corporate ownership around the world. The Journal of
Finance, 54(2), 471-517.
25
Claessens, S., Djankov, S., Fan, J. P., & Lang, L. H. (2002). Disentangling the incentive and entrenchment
effects of large shareholdings. The Journal of Finance, 57(6), 2741-2771.
26
Bertrand, M., Duflo, E., & Mullainathan, S. (2004). How much should we trust differences-in-differences
estimates?. The Quarterly Journal of Economics, 119(1), 249-275.
27
Supra 19.
12
corporation is committed to “exchange clauses”, which can be between the corporation and
government or corporate executives and government officials. However, the effectuation of the
contract is subjected to various conditions. As implicit contracts are not court-enforced and sustained
mainly through the threat of future retaliation by the government. Corporations making efforts to be
connected with government or government officials are facing the risk that government will not fulfil
the contract, and the risk is further magnified by linking the initial risk the corporation faces to
political risks. Furthermore, if the information regarding corporate political spending is released to the
market, the corporation will not just need to pay attention to market confidence but also political
opinions.
D. Explicate the Implicit Contract: Disclosure of Corporate Political Spending
Currently the responsibilities for disclosure of corporate political spending mainly falls on
recipients, candidates and parties is disclosing the amount and the source of their funding as required
by the campaign finance law. The potential problem for this information disclosure arrangement is
that this unilateral disclosure by recipients has the risk of misrepresentation through concealment of
the actual amount28. The other significant reason that the public petitioned the rule making agencies is
that the lack of corporation-centred information supply costs interested stakeholder a great amount of
time to gather it from the campaign finance disclosures, and there is also no guarantee that they will
collect the full set of information.
Academics argue for the rationale of corporate political disclosure: their main arguments come in
two layers: 1) regarding to the spending itself, it is suggested that a growing number of shareholders
are showing interest in learning about the spending. The scope, amount through all channels,
frequency and timing are all considered useful information for stakeholders to develop their
investment decisions29. Moreover, it is not just about the right to know, but more importantly about
28
Citizens for Responsibility and Ethics in Washington, The Myth of Corporate Disclosure Exposed, 2014,
http://www.citizensforethics.org/page//PDFs/Reports/4_15_2014_Myth_of_Corporate_Disclosure_Exposed_The_Problem_with_Political_Spending_
Reports_CREW.pdf?nocdn=1
29
Bebchuck, Shining Light on Corporate Political Spending, 2012. 101 Geo. L.J. 923 (2012-2013)
13
gaining the consent of this non market strategy; 2) regarding disclosure, one of its effective ways of
increasing the accountability of the firm.
The solution of this question comes down to the right legal strategies and the effect of the chosen
strategy. Legal strategies in the corporate law context usually refer to “a generic method of deploying
substantive law to mitigate the vulnerability of principals to the opportunism of their agents”30. To
achieve this goal, the most common methods can be found in the following table 1:
Table 1 Legal Strategies Deployed in the Corporate Law Context
Regulatory strategies
Governance Strategies
Agent
Affiliation
Appointment
Decision
Agent
Constraint
Terms
Rights
Rights
Incentives
EX ANTE
RULES
ENTRY
SELECTION
INITIATION
TRUSTEESHIP
EX POST
STANDARDS EXIT
REMOVAL
VETO
REWARD
Source: Hansmann, H., & Kraakman, R. (2004). Agency problems and legal strategies, P23.
Whether to choose ex ante rules or ex post standards to regulate corporate political spending
disclosure depends on the regulatory goals. Lawmakers have employed information as a regulatory
tool since the insurance disclosure31, for its political neutrality and less interference in the market
operation and individual choice. When comes to opposing regulation, mandatory disclosure has
become one of the regulators’ favourites.
However, before any regulation being implemented, it is supposed to have a goal to accomplish,
and it is expected to consider the mechanism through which the goal will be accomplished.
Disclosure-based regulation often states the purpose such as “improving transparency” or “providing
30
31
Hansmann, H., & Kraakman, R. (2004). Agency problems and legal strategies.
Miller, F. H. (1979). Truth in Lending Act. The Business Lawyer, 1405-1422.
14
information to consumers,” but it is less explained why the additional information will be valuable, to
whom it will be valuable and how it leads to behavioural changes as desired to32.
The mechanism by which information affects behaviour is complex. The information must be
directed at the appropriate decision-maker and the appropriate decision. Furthermore, it must be
provided in a form accessible to and usable by the appropriate decision-maker, and the decisionmaker must be able to respond to the information. Moreover, disclosure can have significant costs
beyond the costs of creating and disseminating the information within the context of nexus of
contracts.
III. Political Foundations in Change: The Contract of Dynamics
Christopher Bruner33 has developed the political theory of corporate governance in the commonlaw world by arguing that the diversified degree of managerial power structure can be explained not
just by how the corporate governance systems varies among countries, but it also needed to be
considered in the broader social and political context.
Based on this theoretical framework, the implicit contract between government and business is
set to the context of environmental changes. When it comes to changes along timeline, industry policy
or government regulations over business activities commonly only can come into being after the
industry or business developed to certain salient degree. When the formal institution, i.e. legal system
is behind the practical need, the substantial mechanism will fill in the blank and meet the actual
demand of the parties involved.
Specifically, for most industries, only when the sector has developed into certain level, would
government implement specific regulation. For example, only when the monopolies emerged, would
antitrust laws come into shape; government only considered environmental protection laws and
regulations after seeing social problems caused by environmental pollution. Few government will take
32
Ripken, S. K. (2006). The dangers and drawbacks of the disclosure antidote: toward a more substantive
approach to securities regulation. Baylor Law Review, 58(1), 139-204.
33
See Supra 2.
15
precautions before an industry or an issue coming into being. Which is to say, when the government
began to regulate an industry, the industry generally has been relatively mature, where the main big
players in the industry are already in place. At this time, any implementation of laws and regulations
will no doubt affect those enterprises have already occupied a dominant position in the market.
Moreover, it are those leading industries or corporations who have the capacity to make their voice in
the legislative process. For them, getting involved in the political activities are mainly for the
corresponding power, which potentially can act as an insurance for the vested interest.
In an ideal world, each corporation would want politicians who can offer more support come into
power. However, there are numerous players rather than just one firm, and they all have their own
favourite candidates. For the corporation, it is too risky to “bet” on a single candidate or a single party,
which will turn into a disadvantage if the others came into power. Even if the candidate/party was
elected, due the common feature of campaign finance, the candidate/party must have accepted
donations from more than one single Political Activity Commission (PAC). Under the influence of
diversified PACs, it is unrealistic for the candidate/party to make any individual promise. Meanwhile,
what concerns the leading corporations behind those PACs is not how to develop themselves based on
some newly introduced laws or regulations. For the most of the time, these corporations are concerned
about their vested interests from a market which was originally lack of supervision will decrease due
to the new laws or regulations, which will give opponents a better chance to challenge their market
position.
Therefore, for most corporations, they realized that the most important thing is not to elect a
candidate/party who can help implementing laws and policies fit their interest best to expand the
vested interests, but to elect one candidate/party will maintain the stability of regulatory environment.
Regardless which political power is in the office, as long as existing policies and laws continues, the
vested interests will be well protected. Corporate political expenditure seems a tacit understanding
between government and corporations. Viewed in this way, it is not difficult to understand that why
currently US Democratic Party are receiving more donations. Because back to 1970s, the US
16
Congress was under the charge of Democrats. It is assumed that corporations make political
contributions to the incumbent party for re-election to ensure the continuity of regulatory environment.
Accordingly, from the perspective of risk hedging, the most of corporations will not make
donations to a single recipient, but donate to several political candidates/ parties at the same time. For
example, Tobacco company Phillip Morris donated 1.6 million to Republican and 0.4 million to
Democrats in 1996 election, while Association of Trial Lawyers donated 0.36 million and 0.16
million to Democrats and Republican separately34. This pattern of political donations is not due to the
support for the party, but more closer to a way of encouragement for the incumbent. As for the
contribution made for the “unfriendly party”, it is more like a hedge, which would possibly prevent
they make a decision against their favour.
By contrast, groups without any vested interest, such as trade unions have less concerns in
donating. In the 2008 election, 55 percent of corporate donations went to Democrats, and 92 percent
of union donations went to the Democratic Party35.
With the emergence of thousands of PACs, candidates/ parties will be subject to donors when
comes to either campaign advocates or afterwards policy proposals for the purpose of the financial
support as well as potential voters. Therefore, implicit contract between government and business is
the result of a repeated game containing changes of corporate governance structures and market
positions of multiple players.
VI. The Usefulness of the Disclosure
The disclosure-based regulation is supposed to reduce information asymmetry in the market,
from the perspective of effective communication, the goal can only be achieved on the condition that
the targeted audience have got the essential information in a perceivable form. Moreover, the
recipients must care enough about the information and have the ability to make influential decisions.
34
35
Data source: www. opensecret.org
See id.
17
More importantly, the corporation is willing and able to make adjustment according to the market
pressure36.
However, from the analysis above, given the disclosure regulation is viewed as the development
result of the implicit contract, the regulatory disclosure scheme will be implemented when the content
of contractual relations become explicate and stable. Instead of the policy aiming at producing certain
result in the market, disclosure regulation is the outcome of the interaction of market participants.
From this point of view, the effectiveness and therefore usefulness of disclosure as regulation in
corporate political spending becomes will not be the only issue that matters in the discussion. When
the disclosure of implicate contract between government and business become optimal for the
regulator or the corporation, the information, i.e. the explicate provision will be offered to the market.
Implicit contracts can be taken as the early stage of formal contracts. Whether this informal
institution can become formal and being accepted by government and business depends on the cost
and benefit of this disclosure for the dominant market participant. Therefore, regardless of whether
there is too much information in the market or whether the regular market participants have the
capability to process the information, the disclosure of corporate political spending will come into
being when this part of content of implicit contract between government and corporation becomes
explicit.
V. Conclusion and Further Discussions
Through lenses of the nexus of contracts theory, disclosure regulations of corporate political
spending is reframed as implicit contract between government and business in this paper, followed by
the discussion of the terms of the binary contract. Corporations develop political connections at the
cost of financial donations or deduction in ownership and control, in return, they incline to get easier
access to profit monopoly power, preferential financing access, and positive public image. Moreover,
36
See Dalley, P. J. (2007). The Use and Misuse of Disclosure as a Regulatory System. 34 Florida State
University Law Review 1089-1131.
18
the candidate/party receiving donations have been benefited from increasing odds of getting elected or
re-elected due to the financial contributions.
Through the analysis of the interaction of government and corporation in the contractual relation
in dynamics, a hypothesis can be deducted that government as a contractual party with regulatory
power will also pursue the maximum of its welfare. Whether to pass a pending regulation mostly
depends on to how much degree it will serve its comprehensive goals. In this case, if the income from
corporate political spending is part of the government concerns, the disclosure regulation appears not
the current best choice due to the potential adverse effect. The timing of implicit contract become
explicit is still subjected to the benefit-cost evaluation result of the dominant contractual party.
Although the disclosure regulation of corporate political spending can be affected by many other
factors, the conceptual framework developed in this paper can be a start of analysing how implicit
become explicit and hence the legislative dynamics.
19
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