Is It Worth It? Political Spending and Corporate Governance
In the 2012 campaign cycle an astounding $6 billion dollars was spent, with American corporations contributing roughly one third of that total. Just as political pundits are assessing the aftermath of the campaigns, it’s time for corporate America to take a hard look at the return on its investment.
I suspect most of corporate America will find it received only two returns on its roughly $2 billion investment: First, the continuation of the status quo – a divided and closely contested political process that probably won’t enact any kind of sweeping policy changes. With the Obama Administration remaining in power for four more years, the implementation of the Affordable Care Act, Dodd-Frank and the various EPA rules on environmental issues will proceed as scheduled through various executive branch orders and rulemakings.
Secondly, there is a real possibility of lasting damage to numerous companies’ reputations and bottom lines. That damage could spring from three primary sources: new approaches to corporate political expenditures, lack of control over political spending made by trade associations and other groups on behalf of member companies, and a lack of transparency around political contributions.
Until recently, most companies engaged in political giving through direct contributions to candidates via the political action committee (PACs). Nearly every PAC is governed by a team of the company’s executives who follow guidelines approved by the board of directors or legal counsel. Under federal law, these contributions are limited to $5,000 per candidate, per election. In other words, most corporate political giving was defined in scope and followed a clear set of policies.
A company’s ability to exercise clear governance over its political giving began to lessen in 2010 following the Supreme Court’s Citizens United decision. As a result of Citizens United, corporations and labor unions are able to make unlimited independent expenditures in support of or opposition to political candidates. Not only can corporations contribute to the so-called “Super PACs,” but they can also anonymously channel money through trade associations or 501c4 groups also known as “social welfare” groups.
Spending through trade associations or c4 groups are where the most significant breakdowns in corporate governance seem to have occurred in the 2012 election cycle. It should be noted that the problems began to show up in the 2010 election cycle. There are reports that, in some instances, independent expenditures by trade associations and c4 groups ultimately made their way to candidates whose policies are harmful to the long-term interests of the companies making the contributions.
As the Center for Political Accountability noted in a Conference Board Review article, “When a company contributes to one of these outside groups, it cedes control over the use of its funds while remaining accountable to its customers, shareholders and employees on how the money is eventually spent. A contributor’s own goals and intentions can be easily ignored. Lacking basic internal controls and external accountability, the groups spend as they please” (“The 2012 CPA-Zicklin Index of Corporate Political Accountability and Disclosure” and “Dangerous Terrain,” The Conference Board Review, Winter 2012).
There is growing evidence from academic studies that excessive campaign contributions represent a diversion of resources that stunt the long-term growth of the company. In a recently published paper, Harvard Law Professor John Coates determined that increased political activity by S&P 500 companies led to limited shareholder power and lower shareholder value. Coates goes on to assert, “Contrary to the Supreme Court’s stated assumption, shareholders were not able to protect themselves from misuse of corporate funds for political purposes prior to Citizens United, and the risk of such misuse has increased as a result of the decision” (“Corporate Politics, Governance, and Value Before and After Citizens United,” Journal of Empirical Legal Studies, 2012)
Due to shareholder concerns, the Securities and Exchange Commission is giving serious consideration to a rulemaking petition that would require companies to disclose their political spending made with corporate funds. Harvard Law Professor Lucian Bebchuk recently noted in the New York Times that the SEC has received more than 300,000 comments on a rule making petition, and that the “overwhelming majority of these comments were supportive” (“Letting Shareholders Know How Their Money is Spent,” New York Times, November 14, 2012).
Beyond potential regulatory changes, the growing lack of control over corporate contributions comes at a particularly risky time for corporate reputations. For example, earlier this year, research conducted by Hill+Knowlton Strategies found that:
- 61% of the public do not trust companies to do what is right;
- 60% of the public believe that corporations do not behave more responsibly than in the past; they just intentionally mislead or try to confuse the public; and
- 66% of the public believe that corporations are less accountable than ever before for their actions.
This is not to argue that companies must withdraw from the political process or cease political contributions. Companies and their leadership have perfectly legitimate reasons for political engagement, and many of them directly benefit the company’s bottom line.
However, it is imperative that companies take a much more proactive and transparent approach to the governance of their political giving.
To their credit, a number of leading companies have implemented measures to exercise greater control over political spending. Building on the recommendations in the Handbook on Corporate Political Activity developed by The Conference Board, companies might consider the following policies and practices for managing and overseeing their political spending:
- Establish political giving guidelines that are aligned with the strategic business objectives, brand and reputational goals of the company.
- Determine the appropriate role of the board. In most cases, boards oversee the process and guidelines rather than make specific contributions. In doing so, they often provide a valuable reality check in ensuring the giving policy is aligned with the broader objectives of the company.
- Draw boundaries around political giving. Companies such as IBM and Colgate-Palmolive Company ask trade associations not to use their payments for political purposes, and companies such as Dell and Accenture only make political contributions through their PAC.
- Increase disclosure. If the money is worth spending to achieve a legitimate policy outcome, then it should be able to withstand public scrutiny. Merck, Microsoft, Aflac and Exelon are seen as leaders in transparency around their contributions.
Thus, as corporate leaders look back on the 2012 election cycle with an eye to future political activity, they will be well served to closely assess the level of control they have over how their company’s money is being spent – and how those expenditures are communicated internally and externally. Companies that exert direct control over corporate giving and embrace transparency are much more likely to ensure that strategic political contributions achieve the intended positive impact.