Man is a political animal,” Aristotle famously declared more than two millennia ago. Now, thanks to the U.S. Supreme Court, so too are companies.
In its Citizen's United ruling in 2010, the Court vastly broadened the type of political spending open to corporations. Whether or not you agree with the court as a concerned citizen, you don't have a choice but to consider the ramifications of Citizen's United ruling as a board member.
Measured by traditional financial metrics, corporate political spending is relatively minor. An IRRC Institute/Sustainable Investment Institute (SI2) study found that the aggregate political spending of the S&P 500 in 2010 was $1.1 billion or about $144 per $1 million in revenue. That included spending on federal lobbying and federally registered political committees, and state-level candidates, parties and ballot initiatives, but not local races or “indirect spending” through trade associations and other third parties. Of that, the vast majority was for lobbying.
High risk, high impact
However, mere dollars understate the importance of such expenditures; political spending is high risk/high impact activity with impacts disproportionate to the dollars spent. Political expenditures are the eye not of a storm, but of a hurricane. And it's buffeting a number of companies. Consider just a few examples:
• Investors filed 120 proxy resolutions relating to political spending this year, double the number just two years ago, according to SI2. At least partially as a result, a host of companies, including Aflac, Cigna, Coca-Cola, CSX, Eli Lilly, General Electric, Halliburton, Johnson and Johnson, Hershey, Northrop Grumman, Occidental Petroleum, RR Donnelly, Reynolds American, Safeway, Sempra Energy, and Zimmer Holdings, have agreed to improve the governance and transparency of their political spending, including lobbying and indirect spending through trade associations. Some companies, such as Chubb and State Street, have agreed to ban indirect political spending outright.
• A veritable who's who of American corporate icons, including McDonald's, Intuit, Kraft Foods, Coca-Cola, Wendy's, and PepsiCo, have ceased financial support of the American Legislative Exchange Council following a civil rights group highlighting the companies' financial support and tying it to ALEC's role in promoting so-called “stand your ground” and voter identification laws.
• Various companies have found that their political contributions have damaged reputations that took years to build. Last year PG&E, which had carefully burnished its “green” credentials, was the major funder of a ballot initiative in California to restrict a municipality's ability to create a local utility. The Sierra Club's critique was pointed: The spending “makes a mockery of its self-proclaimed leadership in clean energy and climate protection.” A year earlier, Target was famously threatened with a consumer boycott following revelations that it had funded a Minnesota business association that then supported a candidate with views antithetical to Target's avowed positions.
• Reputational risk now extends to board members. Most recently, a number of institutional investors targeted two members of WellPoint's board to protest that company's involvement in the transfer of $86 million to the Chamber of Commerce from one of Wellpoint's trade associations during the health care reform debate. The Chamber lobbied against several proposed reforms that WellPoint said it supported.
On the other hand, numerous companies have found political spending useful, and perhaps necessary, to make policymakers hear their point of view. For example, Microsoft eschewed most such spending until the Department of Justice filed antitrust actions against it in 1998. Since then, it has become a constant presence in Washington. Microsoft now boasts one of the most explicit and detailed political spending policies in the country. Clearly, the software giant believes such expenditures, well-governed and disclosed, make business sense.
What's a board to do?
All of which provokes a number of questions: Should your company spend money for political purposes? If so, how, under what circumstances, with what type of controls and what level of disclosure? Here is how your board can align your policies and procedures with emerging best practice.
First, take the time to acquaint yourself with two key reports on the subject. The “Handbook on Corporate Political Activity” from the Conference Board is a great starting point for directors trying to familiarize themselves with the subject. It suggests how to create policies and procedures, but is a bit general about specific best practices. Then, move on to the IRRCI/SI2 report, “Corporate Governance of Political Expenditures: 2011 Benchmark Report on S&P 500 Companies.” The authors reviewed 240,000 different documents to benchmark governance practices, spending amounts, and disclosure levels.
The reports clearly show that a number of best practices are emerging in just the two years since the Supreme Court's ruling:
• Oversight of political spending is becoming a board responsibility. In 2011, 31 percent of the S&P had board oversight of such spending, up from 23 percent in 2010. As noted above, many more companies are adopting board oversight policies this year. Some advocates ask for the board to review political spending twice a year, but annual seems to be the standard practice.
• Consider whether your company needs to make political expenditures at all. Some 57 companies in the S&P 500 have a very simple policy when it comes to political expenditures: “No.” However, be careful and be explicit: A number of companies that have made no spending pledges have later been found to have violated them. Part of that disconnect is definitional: Some companies don't consider spending for lobbying or on state ballot initiatives or through third parties to be political expenditures, while investors generally do.
• Pay particular attention to your policy regarding allowing trade associations and other third parties to use your contributions for political purposes. This is clearly the hot issue of the moment, and is at the core of the controversies that surrounded Target, WellPoint, and all the companies who gave to ALEC. There is a reason about 20 percent of the S&P 500 now pledge no indirect political expenditures: Companies feel they give up control over their dollars but retain all the reputational risk.
• Disclose your policies and contributions. As of a year ago, 84 percent of all S&P 500 companies made some type of statement regarding political spending on their websites. Two-thirds disclosed who at the company makes political spending decisions. And about a fifth of the companies disclosed the actual contributions. Again, that number seems to be growing, and in some sectors, such as health care, contribution disclosure is twice as prevalent.
• Test your controls. Ask management about its controls in this area, and about how it communicates its policies throughout the workforce. If necessary, ask for a listing of all direct and indirect political expenditures your company made this year, including state and local races and ballot initiatives. Do they conform to corporate policies?
Whether or not you believe America is better or worse as a result of Citizen's United, the fact is that it's currently the law of the land and political spending is a key issue of the day. As a board member, you don't have the choice of ignoring it; only the choice of choosing the correct policy, oversight, and disclosure regimen for your company. â–
The author can be contacted at jon@irrcinstitute.org.