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Perspectives: February 2016

The Astute Board Member’s Guide to Corporate Political Spending
By Constance E. Bagley, Bruce F. Freed, and Karl J. Sandstrom

The 2016 U.S. election cycle is on track to break political spending records, with companies expected to continue to be the largest spenders. As the Center for Responsive Politics has pointed out, “Whatever slice you look at, business interests dominate.” This is especially the case for Congress and elections at state and local levels.

As fiduciaries, directors have a duty to establish a clear policy regarding political spending and to oversee management’s execution of that policy. Active and informed director oversight helps shield companies from illegal behavior and spending that conflicts with a firm’s business strategy. It also helps protect companies from the embarrassment and bad publicity that can tarnish a brand and weaken a firm’s relationship with its employees, customers, shareholders, and regulators. These practices help promote the integrity of the democratic political process, especially in the wake of Citizens United.

At a minimum, the board must take reasonable steps to ensure that the company complies with all applicable election laws. But astute directors do more: they actively manage the potential opportunities and pitfalls of engaging in the political process.  Just as outsourcing a firm’s supply chain without adequate monitoring can expose a company and its directors and officers to unwanted attention — think Apple Inc. and Foxconn — so can the outsourcing of political spending without proper supervision. The risks are particularly acute when companies give money to political intermediaries that do not disclose their donors, so-called “dark money.”   

Directors in a range of industries have been stung by media reports that intermediaries, trade associations and “social welfare organizations” used corporate money to help fund causes or candidates averse to the corporation’s business interests or its espoused values and positions. Some examples:

  • Despite its adoption of political transparency, Aetna reportedly made undisclosed contributions totaling $7.5 million to the American Action Network and the U.S. Chamber of Commerce, the largest lobbying group in the United States. These funds were in turn used to attack the federal Affordable Care Act, which Aetna had publicly supported. Shareholder resolutions and a lawsuit ensued.
  • Several leading manufacturers of contraceptive products gave money to a trade association that contributed to groups that backed congressional candidates opposed to promoting contraception. 
  • CVS Health resigned from the Chamber of Commerce after the press revealed the Chamber’s efforts to challenge anti-smoking activities and laws globally. The Chamber’s activities were antithetical to CVS Health’s strategic decision to promote customer health by no longer selling tobacco products in its stores. Chamber members Anthem and Aetna reportedly did nothing about the association’s activities despite holding strong anti-smoking positions.

Conversely, Merck, Noble Energy, Exelon, Prudential, Microsoft, and other corporate leaders have recognized that oversight and disclosure protect not only the company but also its shareholders and other stakeholders. Michael Dykes, Monsanto’s head of government affairs, explained: “Clear policies help us manage resources.”  Microsoft’s senior director of corporate citizenship Dan Bross noted that “companies are increasingly embracing openness and transparency.”

Safely navigating the largely uncharted waters of corporate political spending requires directors to first decide whether the company should engage in political spending at all. If the answer is yes, then the board needs to both properly disclose that spending and ensure that appropriate oversight and other policies and procedures are in place. Drawing on The Conference Board’s Handbook on Corporate Political Activities (2010), the findings of the annual CPA-Zicklin Index of Corporate Political Disclosure and Accountability, and selected company policies as well as our own extensive work with companies and boards and our interviews with corporate governance experts, company executives, and directors, we developed the guidance that follows. It was first published in the Harvard Business Review on October 30, 2015.[1]

Question One: Should We Engage in Political Spending?

First, directors need to decide whether the firm should engage in political spending at all. There are many reasons why the answer might be no, including concerns about corrupting the political process (or appearing to do so) and exposing the company to reputational harm. There are also solid reasons why the answer might be yes, including having the ability to help shape public policy and to get a hearing with the lawmakers and executive branch officials who will set the “rules of the game” for the company and its competitors. Even though U.S. Supreme Court Justice John Paul Stevens wrote a scathing dissent to the majority decision in Citizens United, which opened the floodgates of corporate political spending, he acknowledged that “[b]usiness corporations must engage the political process in instrumental terms if they are to maximize shareholder value.”

If the board decides to authorize political expenditures, then the directors need to consider questions such as, “On what basis should the company contribute, and how are its donations likely to affect both the company and the kind of environment it needs to thrive?” For example, supporting a voter initiative calling for lower property taxes might at first blush appear to be in a technology firm’s best interests but not if it results in underfunded public universities graduating less qualified engineers or massive traffic jams caused by collapsed bridges or inadequate public transportation.

Question Two: Should We Disclose that Spending?

We believe that public disclosure of corporate political spending is now best practice. The 2015 CPA-Zicklin Index, an annual non-partisan benchmarking study of company political transparency and accountability policies, found that half of the companies in the S&P 500 Index disclose some or all of their contributions of corporate funds to candidates, parties, and committees or have policies not to make such contributions. The percentage is even higher for companies belonging to the influential S&P 100: seventy-eight companies have some form of disclosure as well as board oversight.

Many of the leading politically active trade associations prefer secrecy and have employed a circle-the-wagons defense. Opponents protest that such sunlight would silence companies and undermine their free speech rights. Microsoft’s Dan Bross disagrees, finding “no evidence that the increased calls for disclosure have discouraged anyone from participating in the political process.” Moreover, transparency is necessary to provide the shareholders the ability to monitor the politicking done with their money and in their name.  Monsanto’s Michael Dykes commented, “We believe the information we make available strikes the appropriate balance between transparency and excessive burden and cost.”

Question Three: How Do We Provide Oversight?

Forty-three percent of the respondents to the 2015 CPA-Zicklin survey reported that their boards regularly oversee the firm’s political spending. Effective oversight requires expertise and the exercise of informed judgment guided by an ethical compass. CEOs benefit from active collaboration with independent directors who can help ensure that neither the CEO’s leadership nor the company’s strategy is undermined by political expenditures at odds with the values for which they stand. Imagine how Tim Cook, Apple’s CEO, would have felt if, after he publicly disclosed his sexual orientation, he learned that the company had contributed to a trade association that had, unbeknownst to Apple and Cook, supported an anti-gay rights initiative.

So, what does effective, knowledgeable oversight entail?

First, directors need to know and understand the:

  • Basics of political spending, including various types of direct and indirect political spending and applicable laws and regulations.
  • Kinds of risks posed by political spending.
  • Red flags, such as failure to follow company policies on making contributions; contributions that conflict with company values, positions or business strategies; contributions that hint of quid pro quos for political favors; and changes in company spending patterns.

 Next, directors need to set clear and concise policies that:

  • Specify what kinds of political spending the company will, or will not, engage in. Some companies, for example, have a policy of contributing only to ballot initiatives. Others restrict use of company payments to trade associations for political purposes. Still others bar contributions to politically active 501(c)(4) nonprofit groups, which are permitted to conceal their donors.
  • Outline the decision-making procedures that management is required to follow before the company makes a political contribution or expenditure, including a requirement that these decisions be broadly discussed within the executive suite in advance.
  • Require disclosure of any political spending. Transparency is broadly accepted today as part of good corporate governance, as seen in the steady increase of companies adopting disclosure and accountability policies.                                                                                         
  • Provide for board oversight of political spending, including semi-annual reports made to a specified board committee (comprising independent directors) and, at a minimum, an annual review by the full board.
  • Institute compliance checks to ensure that management adheres to company policies.
  • Require third-party groups to report to the specified board committee how they plan to use the company’s money and to identify their other contributors. To evaluate risks, directors need to know how the company’s money will be used and with whom the company is being associated.

 Finally, director-executed political spending review should include:

  • Ascertaining how the company’s policies are carried out.
  • Assessing how the company’s compliance program is implemented.
  • Determining the impact of political spending on stakeholders, the firm’s long-term interests, on broader issues in which it may have a stake, and the needs of the society in which the company operates.
  • Obtaining outside assistance or counsel for advice, expertise or help. Directors need to act independently and should not just accept management’s conclusions at face value or accede to its directives.

The enlighted self-governance we advocate helps protect not only the company and its shareholders, but also the democratic political process and the broader society on which enduring business success ultimately depends. Transparency serves as a check on the exercise of corporate power and removes the specter of secret sweetheart deals offered only to well-heeled industry players. The integrity of the upcoming election cycle and the quality and effectiveness of the policies enacted by those elected will depend, at least in part, on whether directors put robust and knowledgeable oversight of corporate political spending on their agenda.

[1] Aspects of this commentary were also drawn from a December 14, 2015 posting in Columbia Law School’s Blue Sky Blog.

About the Authors:

Constance E. Bagley is a Senior Research Scholar in Law at Yale Law School. She previously served as Professor in the Practice of Law and Management at Yale School of Management, Associate Professor of Business Administration at Harvard Business School, and partner at Bingham McCutchen LLP.

Bruce F. Freed is the President of the Center for Political Accountability, a Washington, D.C.-based NGO working to bring transparency and accountability to corporate political spending.

Karl J. Sandstrom is Senior Counsel of Perkins and Coie, a former member of the Federal Election Commission, and Adjunct Professor of the Washington College of Law at American University.

Download the Committee's Report
Handbook on Corporate Political Activity
This handbook offers an overview of the legal rules and standard practices related to political activity, as well as a discussion of internal oversight of political spending.

Complimentary registration required.

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