10 Principles for Board Political and Social Engagement

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Plus 10 recommendations for boards to consider.

 

 

 

 

 

Given the importance of corporations in society, it is reasonable to assume that any given corporation’s involvement in social and political matters will be based on a set of articulated principles. But what principles should apply, and who should determine them?
  
One authoritative answer comes from the basic concepts of care and loyalty, the board’s main fiduciary duties under state law, where corporations are chartered. The duties of care and loyalty and related fiduciary concepts can be a useful guide to boards as they evaluate, shape and/or approve a social or political stance on the part of a corporation. This litmus test has value in setting boundaries for engagement. Otherwise, the list of potential principles could be endless — and so too could be the list of external events that would elicit a company statement. How, then, should the list of applicable principles be narrowed?
  
The following principles apply with respect to corporate social and/or political engagement. To illustrate each principle, we will use the Merriam-Webster dictionary definition and then apply it to oversight of corporate social or political activism.
 
Attention has been defined as “… a selective narrowing or focusing of consciousness and receptivity.” In this sense, U.S. courts have found a “duty of attention” related to the duty of care. In the landmark 1996 decision on Caremark, Chancellor William T. Allen of the Delaware Court of Chancery acknowledged such a duty as part of the duty of care but stated that the duty applied to motivation and process, not outcome: “Where a director in fact exercises a good faith effort to be informed and to exercise appropriate judgment, he or she should be deemed to satisfy fully the duty of attention.” Recommendation: To fulfill their “duty of attention,” directors should heed social issues while setting and/or reviewing company policy on these and related issues, and they should also pay attention to a company’s political contributions and lobbying activities.
 
Accountability has been defined as “an obligation or willingness to accept responsibility or to account for one’s actions.” A recent legal article states that “A key aspect of accountability, which determines its effectiveness in reducing cognitive bias, is whether the requirement to account for a decision was known prior to making the decision. Prior accountability … is thought to encourage exploratory reasoning and making an optimal judgement, whereas post-decisional accountability has been found to increase confirmatory and self-justifying reasoning” (Enide Maegherman, Karl Ask, Robert Horselenberg & Peter J. van Koppen, “Accountability in legal decision-making,” Psychiatry, Psychology and Law, 2021.) Recommendation: To be fully accountable for their social stances and political contributions, companies should determine and articulate in advance of public events what kinds of positions the company will take and why, and directors should play a role in making this determination. 
 
Independence has been defined as “not subject to control by others.” In the realm of politics, it means not being affiliated with any particular political party. In this sense, most corporations are independent politically. Recommendation: Any policy for social or political engagement should start from a position of independence or neutrality on the issue or candidate, and work from there based on the company’s core values and strategy. 
 
Fairness has been defined as an attitude “marked by impartiality and honesty: free from self-interest, prejudice or favoritism.” This is a particularly useful concept to apply to social and political engagement. Recommendation: When determining policies for social and political engagement, directors should ask if the policies are impartial and fair to all company stakeholders.
 
Care can be defined as “painstaking or watchful attention; responsibility for or attention to health, well-being, and safety.” Directors have a duty of care for the status of the corporations they serve. As noted by the Legal Information Institute at Cornell University, under the duty of care, when directors and officers of a corporation make decisions in their capacities as corporate fiduciaries, they must act in the same manner as a reasonably prudent person in their same position would act. Courts will find the duty of care has been met so long as the fiduciary executed a reasonably informed, good-faith rational judgment without any conflict of interest. (If a plaintiff can show a conflict, the defendant director can still meet the duty of care by showing “entire fairness” in process and outcome.) Recommendation: As they pay attention to the issue of social and political engagement, directors should ask themselves what is most prudent in the situation, given known facts and circumstances.
 
Diligence has been defined as “devoted and painstaking work and application to accomplish an undertaking” and further as “the attention and care legally expected or required of a person.” This principle can be usefully applied to director involvement in a corporation’s social and political engagement. Recommendation: When determining policies for social and political engagement, directors should exercise an appropriate level of diligence, spending adequate time discussing and determining these policies.
   
Good faith has been defined as “honesty or lawfulness of purpose.”  When CEOs make statements about social issues based on what they personally believe, and when corporations make political contributions within the limits of the law, the good faith test is satisfied. While good faith is not enough to justify social and political engagement, it can contribute to its integrity. Recommendation: Boards can use the concept of good faith to justify social and political engagement that has already occurred, and to check the motivation and status of engagement that is planned. 
 
Loyalty has been defined as “unswerving allegiance, such as …. faithful[ness] to [an] institution.” Along with the duty of care, the duty of loyalty characterizes the director’s role as a fiduciary, which means placing the interests of a corporation above personal interests. This means that an individual director or officer who has fiduciary duties to all shareholders and to the corporation as a whole should not let personal convictions determine what corporate stances to take or what corporate contributions to make. Recommendation: When determining what issues, political parties or legislation to support, decision-makers should avoid conflicts of interest and ask themselves how these decisions will affect the corporation. 
 
Oversight has been defined as “watchful and responsible care” or “supervision.” Despite the obvious connection between the action of oversight and the meaning of “care,” the oversight duty is primarily associated with the duty of loyalty, because a board’s vitality of oversight can point to the presence or absence of good faith, a component of loyalty. Recommendation: As part of their policy on social and political involvement, boards should provide evidence of active oversight of these issues in good faith. This oversight can contain several layers —  for example, with the issues regularly appearing on the full board’s agenda, and embedded into the charter of an appropriate committee.
 
Transparency, defined as “the quality that makes something obvious or easy to understand,” is a fundamental principle, since the system, which enables the public to buy and trade company securities, is built on disclosure. Clearly this principle is contradicted by “dark money.” According to researchers at the Institute for Free Speech, citing data from the Center for Responsive Politics, the percentage of untraceable contributions is only about to 3 percent to 5 percent, although another source puts it at about 20 percent. The current policy of the Council of Institutional Investors (as of January 2022) states that each corporate board should “monitor, assess and approve all charitable and political contributions (including trade association contributions) made by the company.” The policy includes guidelines for such approval, and also recommends that dollar amounts and recipients of any contributions be reported annually. Recommendation: Corporations should comply with all required disclosures and, in addition, publish their policies for social stances, political contributions and lobbying.
 
The above 10 principles do not usually appear in CEO statements about social issues or in policies related to corporate expression in the social or political domain. And given their highly nuanced legal overtones, they may not provide ideal language for corporate policies. Nonetheless, they are anchors of good governance. Therefore, when directors are creating a process for development, review and approval of polices for social and political engagement, they should consider these enduring corporate governance values.
 
For more information on the principles for board political and social engagement, check out "Excerpts of Sample Policies of Political Expenditures."

 

 

 

 

 


Alexandra "Alex" Reed Lajoux retired from the National Association of Corporate Directors as chief knowledge officer emeritus in 2016 after 30 years there. From 1978 to 1981, she served as editor of Directors & Boards, which was founded by her father, Stanley Foster Reed, in 1976.

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