Company Directors Need to Oversee Corporate Political Spending

As political spending surges toward record levels in 2016, post-Citizens United changes in the funding of American political campaigns will require directors to oversee a dramatically deregulated political environment. Corporate money will play a large role in the election, heightening risks for companies and shareholders. As a result, directors face a new responsibility to help their companies navigate what is increasingly treacherous terrain.

Just as outsourcing a firm’s supply chain without adequate monitoring can expose a company and its directors and shareholders to unwanted attention — think Apple Inc. and Foxconn – the outsourcing of political spending through trade associations and secretive “social welfare” organizations can put a firm’s brand and its relationship with its employees, customers, and shareholders at risk. Several leading manufacturers of contraceptive products encountered this problem when their trade association contributed to groups that backed congressional candidates opposed to promoting contraception.

And last month, in a case that highlighted the risks posed by direct contributions, Capital One Financial Corp. garnered unwanted publicity over its PAC’s donations to a Republican congressman who allegedly made anti-gay statements in a private meeting. While Capital One underscored its commitment to LGBT rights in a letter to a critic, it also insisted its PAC was devoted exclusively to banking industry issues.

In another recent episode with lessons about political spending, leading health insurers and health care companies were stung by an expose of the U.S. Chamber of Commerce’s effort to challenge anti-smoking activities and laws globally. Chamber members CVS Health, Anthem and Aetna reportedly did nothing about the association’s activities despite holding strong anti-smoking positions. CVS Health subsequently resigned from the Chamber; the others faced sharp questions.

Most Americans, and even directors, would be surprised to find out that U.S. corporations are the biggest source of political money. Wealthy individual donors attract the headlines, but companies fund campaigns at a rate of fifteen-to-one when compared with other categories of donors, including labor and ideological groups.

Based on our conversations with corporate leaders, we believe many board members are ill prepared to provide proper oversight of corporate political spending. Our article — “A Board Member’s Guide to Corporate Political Spending” — in the Harvard Business Review (October 30, 2015) is designed to help directors effectively manage their firm’s political engagement and to ensure that the corporation acts as a smart, responsible corporate citizen.

What are the best practices for directors to follow? We believe strongly in building a deliberate framework for directors to consider when deciding whether their company should engage in political spending. Directors must first gather all relevant information so they can make an informed decision concerning the risks and benefits of corporate political spending. It is critical that directors be fully knowledgeable about the basics of political spending, including various types of direct and indirect political spending and applicable laws and regulations. They also need to identify red flags that could signal serious risks for the company.

If they decide to use the shareholders’ money for electioneering, they should make disclosure of the company’s direct and indirect political spending, including payments to trade associations and “social welfare” organizations, the rule. In addition, directors should actively monitor the spending and set policies on groups the company will, or will not, contribute to, and how the company’s money can be used politically.

To ensure that management in turn follows company policies, compliance checks should be instituted. Third-party groups also should be required to report to the company 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.

As companies face increasing pressures and political spending becomes more opaque, directors should consider obtaining outside assistance or counsel for advice, expertise or help. It’s critical that they act independently and not just accept management’s conclusions at face value or accede to its directives.

Opponents protest that such sunlight would silence companies and undermine their free speech rights. In fact, however, transparency is necessary to provide the shareholders the ability to monitor the politicking done with their money and in their name.

Many of the leading politically active trade associations prefer secrecy and have employed a circle-the-wagons defense. Yet more corporate executives and companies are endorsing transparency each year. The 2015 CPA-Zicklin Index, an annual non-partisan benchmarking study of company political transparency and accountability policies, found that half of the S&P 500 companies provide at least some disclosure of their political spending. Some of their leaders are daring to speak out publicly.

Microsoft’s senior director of corporate citizenship, Dan Bross, remarked: “[C]ompanies are increasingly embracing openness and transparency,” he said. “We are encouraged by this ‘race to the top’ and see no evidence that the increased calls for disclosure have discouraged anyone from participating in the political process.”

Said Michael Dykes, Monsanto’s head of government affairs: “Clear policies help us manage resources.” He went on, “We believe the information we make available strikes the appropriate balance between transparency and excessive burden and cost.”

Active and informed director oversight helps shield companies from embarrassment and bad publicity. Transparency and self-governance also bolster our democratic political process by removing the specter of secret sweetheart deals that are offered only to well-heeled industry players.

The integrity of the upcoming election cycle will depend, at least in part, on whether directors put robust and knowledgeable oversight of corporate political spending on their agenda.

This post comes to us from Bruce F. Freed, President of the Center for Political Accountability, a Washington, D.C.-based NGO, and Constance E. Bagley, a Senior Research Scholar in Law at Yale Law School.