In this article from the Center for Political Accountability, the authors tout the recent “banner proxy season” for disclosure of political spending, both in terms of the uptick in shareholder support for disclosure proposals submitted by CPA (and its “shareholder partners”) and the number of shareholder proposals withdrawn as a result of agreements reached with companies for disclosure of political spending and board oversight. According to the authors, these results reinforce “earlier findings about ‘private ordering’ making political disclosure and accountability the new norm for companies.” Is there a new “eagerness by companies to adopt or strengthen political disclosure and accountability policies”? Is it now viewed as a key element of good governance?  What is the impact of today’s highly politicized environment?

The article reports that there have been steady increases in the percentages of average votes in favor of CPA proposals for political spending disclosure and adoption of policies for board oversight and accountability. This proxy season, 33 proposals on political spending disclosure submitted by CPA and its partners went to a vote, with an average vote in favor of 36.4%, an increase from 34% last year (18 proposals) and 28% in 2017 (22 proposals). More specifically, two proposals actually received majority votes, while 11 were in the range of 40% to 50% and 12 were in the range of 30% to 36%.  And it’s worth noting here that boards often feel compelled to respond to shareholder proposals that receive a significant vote in favor, even if not a majority.  In addition, proposals submitted to 13 companies were withdrawn as these companies reached agreement for spending disclosure and adoption of oversight policies, compared with three in 2018 and seven in 2017.  

The article observes that companies reflected “heightened sensitivity to the harm ill-considered political spending may have on company’s reputation, adversely impacting its relationship with its employees, customers and shareholders. One executive unprompted said… that a controversial contribution can put it at a competitive disadvantage.”  Why is that?

One answer might lie in the CPA’s 2018 Collision Course report, which looked at “risks companies face when their political spending and core values conflict.” These risks seem to be exacerbated by the current political polarization—the “incendiary new political and digital media environment.” It is increasingly difficult for companies that would prefer to stay out of politics to achieve that goal and, as seems to be the trend, when “more companies shift from avoiding the hottest issues of the day to taking a stand, and public passions over political and social issues often boil over into outrage, it leads to a heightened risk for companies: Will their actions align with their core values and brands? Increasingly, this question is being raised publicly about scores of U.S. corporations whose underwriting of political groups and trade associations contributes to outcomes that appear to conflict with core company values and messaging.”

Currently, inconsistencies between large contributions to various election campaigns and through third-party groups and publicly espoused corporate policies and core values are a magnet for media  and other watchdogs.  According to the report, increases in corporate engagement, together with the heightened polarization of the political environment “means these companies are highly vulnerable to reputational and financial risks, even if these risks have not fully materialized yet…. Media and watchdogs are giving increasing scrutiny to cases when company political money and core values appear out of alignment.” Examples (detailed in the report) include several well-known companies that publicly expressed support for anti-discrimination practices, but turned out to have been instrumental in funding the legislators that enacted the discriminatory legislation, or expressed support for the Paris Climate Accord but then, investigations revealed, funded climate deniers. This contradiction can appear hypocritical and may ultimately be toxic for the company’s reputation, potentially leading to backlash. 

To address this heightened risk, the report recommends, companies should enact “corporate governance safeguards to align their political activity with their brands, core values and positions.”  Few companies will be in agreement on all points with politicians to whom donations are made, but, the report recommends, they need to perform an analysis of the risks of any donation.

If companies do decide to make political contributions—and many would argue that they should not—they “can address loss of trust and mitigate heightened risk by adopting transparency and accountability policies and practices for their political spending.” To that end, the report cites recommendations from the “Board Member’s Guide to Corporate Political Spending,” which CPA co-authored in 2015 and published in the Harvard Business Review. The Guide advocates that directors carefully consider whether the company should engage in political spending, whether to disclose it and how the board should oversee it.   Below are CPA’s recommendations from the Guide:

“Directors need to know and understand the:

  • ‘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 [both short-term and long-term]; contributions that hint of quid pro quos for political favors; and changes in company spending patterns.’”

“Directors need to set clear and concise policies that:

  • ‘Specify what kinds of political spending the company will, or will not, engage in.
  • ‘Outline decision-making procedures management is required to follow regarding political spending, including a requirement that these decisions be broadly discussed within the executive suite before the company makes a political contribution or expenditure.
  • ‘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. The Business Roundtable, a group that represents the CEOs of major U.S. corporations, wrote in its 2016 “Principles of Corporate Governance,” “To the extent that the company engages in political activities, the board should have oversight responsibility and consider whether to adopt a policy on disclosure of these activities.”
  • ‘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.
  • ‘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.’”

“Director-executed political spending review should include:

  • ‘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 which the company operates.’”

Donations to third-party groups, such as trade associations and PACs, including state legislative campaign committees and the governors and attorneys general associations, appear to be particularly fraught with peril and merit special attention.  Why is that? According to CPA, that’s because a company that makes a contribution to a third-party group essentially “cedes control over the use of its funds while remaining accountable to its customers, shareholders, and employees on how the money is eventually spent. These third-party groups determine how the money is used; they control the message and decide which candidates to support. A contributor’s own goals and intentions can be easily ignored. Lacking basic internal controls and external accountability, the groups spend as they please.” As noted above, companies making those types of donations should make an extra effort to conduct due diligence on these organizations, including how the funds will be used and with whom the company is being associated by virtue of the donation.

Posted by Cydney Posner