Three essential steps directors need to take to ensure proper management with corporate political spending.
Companies face growing pressure to be more transparent about their political spending as investors and consumers have more information at their fingertips. Technology continues to create new platforms to shed light on corporate political spending – from mobile apps that track donations to citizen reporting on social media that can reach millions. While corporate influence in politics is often criticized, a public opinion poll last October by the Global Strategy Group found that 80 percent of respondents felt it was appropriate for a company to take a stance on political issues that affect its business.
The recommendations discussed below are not legally required – however, the failure to be proactive may result in very public consequences. Key investors are bringing shareholder proposals and even initiating litigation to voice their demands for disclosure. An ongoing lawsuit against Oracle is a prime example. Last October, the New York State Common Retirement Fund filed suit in Delaware demanding the right to obtain Oracle’s records on political spending. The Fund alleges that Oracle has ignored an agreement with certain shareholders to disclose such records and argues that political expenditures can create risks that should be disclosed to shareholders. The Fund brought a similar case against Qualcomm in 2013.
The current election season brings opportunities and risks for companies engaging in the political process. Keeping in mind that each company is unique and that the information below is not exhaustive, there are three essential steps directors need to take to ensure proper management of reputation and business risks associated with corporate political spending.
1. Evaluate the Board’s Process to Oversee Political Spending
Corporate decisions regarding political spending warrant the board’s attention, but it is important to be thoughtful when determining the appropriate level of board involvement. Political spending oversight could fall to the whole board or a specific committee. Directors need a solid understanding of the policies and procedures that exist in order to leverage their unique perspectives and ask questions about political spending. Oversight procedures should be structured and implemented strategically to ensure the advancement of shareholder interests and alignment with management on the company’s participation in the political process.
2. Review Internal Policies and Procedures
As political spending faces greater public scrutiny, detailed policies and procedures are critical to controlling and assessing related risks and facilitating legal compliance. The complex web of regulations governing the ever-changing campaign finance landscape further complicates risk management; each method of political expression carries different disclosure rules. Although Citizens United created new routes for political spending available to corporations, some types of political participation such as direct support of federal political candidates remain prohibited. While many companies stick to more traditional methods of direct participation by supporting PACs, political parties, ballot committees or 527 organizations, shareholder activists also seek information on passive giving, such as payments to trade associations that lobby and donate on behalf of industry interests.
Supporting more innovative spending vehicles, such as super PACs or tax-exempt social welfare groups, carries perceived and actual risks. Giving to what are known as “dark money” groups, nonprofit organizations, or corporate entities that openly or covertly engage in political activity requires proper diligence—recently formed entities that have little or no track record should raise red flags and merit closer examination.
In developing and reviewing political spending policies, the board should also decide whether it is prudent to require approval of each individual expenditure, expenditures that exceed a certain threshold or the aggregate of all political expenditures as part of the annual budget. Company policies should also be clear on whether there are restrictions on the independent political activities of some or all classes of employees; any such restrictions should be developed according to applicable state laws.
Corporate policies concerning political spending should be based on objective criteria that support the company’s long-term goals and strategic interests. Grounding policies and approval of expenditures in whether they promote legitimate business strategy and growth will dispel assumptions that decisions are based on the personal preferences or political ideologies of management. Finally, as with any internal policy, setting out clear guidance on the approval process and internal reporting, as well as employee education and training, are essential to successful implementation.
3. Consider Public Disclosure of Political Spending and Related Policies
Public disclosure requirements may drive a company’s level of participation in the political process. More than 400 S&P 500 companies include a statement of their political spending policies on their websites, according to the CPA-Zicklin Index. Disclosure may be an opportunity to showcase commitment to regulatory compliance and build investor confidence through transparency. It may also be a competitive necessity depending on the industry and the company’s shareholder base. If a company chooses to make disclosures of its political spending activities, they should be clear, concise and timely.
Directors and senior management must determine the level of disclosure necessary to best convey company policy to investors. The CPA-Zicklin Index annually assesses public disclosures of S&P 500 companies and tracks disclosure trends, providing a useful tool to investors, activists and companies. The Index also includes a scoring key that outlines the criteria used to score disclosures. There are simple, noninvasive ways to pick up points. Taking simple steps, several companies bettered their scores by 50 points or more on the 100-point scale in a single year.
As with any corporate governance issue, shareholder engagement is critical. Consider who your shareholders are and keep track of whether they have been active on this issue. Several institutional investors and mutual funds have specifically called on boards and management to oversee disclosure of political spending and monitor whether shareholders have enough information to assess the company’s management of associated risks. Keep in mind that even if not explicitly legally required, there is vocal public sentiment that political expenditures are “material” and that oversight of such expenditures are within the board’s duties.