Pricing the risk and opportunity of political and social engagement.
Corporations have the right to engage in political lobbying, and they have the right, through PACs, to make political donations. With these rights, though, comes the risk and responsibility for the outcomes of these activities.
As the last few years have demonstrated, political and social engagement can be a positive or a negative, depending on who is judging that engagement. You can go too far or not far enough. You can engage in ways that contradict each another. You can find yourself in angry exchanges that do nothing but damage relationships and reputations.So political and social engagement is fraught with risks, and the board, in its oversight role, needs to make these risks a regular topic of conversation with senior management. What is the risk of not making political donations? Does the company potentially lose competitive advantage in pending legislation or regulation? What is the risk of making political donations? Does the company end up supporting those who would overthrow the results of a free and fair election? These same questions can and should be asked about the corporation's public involvement with social issues.
When these are posited as moral questions, as they often are, things get murky. The economist Milton Friedman and I disagree on many issues (but then again, he was awarded a Nobel Prize and mine was apparently lost in the mail). And yet I generally agree with his formulation that corporate morality is really a pricing issue. His discussion on the cost of applying a low-cost fix to the infamous Ford Pinto, versus the cost of the lives lost because of the lack of that fix, is both infuriating and compelling. (You can easily find the video of this on YouTube.)
This is the same approach used by insurance companies, whose long-term prospects depend on their ability to price risk accurately. No insurance company questions climate change, since they've already begun pricing its projected impact into their premiums and walked away from insuring climate-centered risks that they see as too great. (Try to buy private flood insurance.) It's not a moral or political issue; it's a business issue.
And that's how corporate political and social engagement ought to be viewed in the boardroom. Our special section in this issue, “The Board Guide to Political Engagement,” is intended to help boards think through how and where political donations fit into the overall corporate vision and strategy. We've included elements in this guide that will outrage some of you, and other elements that will outrage the rest of you. There's a chart showing companies that have resumed (or never stopped making) donations to legislators who voted against certifying the presidential election, or to those lawmakers' national committees. There are examples of feel-good corporate political statements and policies on political spending.
The point of the section is not to enrage, but to give boards the tools to evaluate the risks associated with taking or not taking a stand — publicly, financially or both. Corporations do have rights, but their boards must be ready for the potential consequences that can emerge from either exercising or not exercising those rights.
It's wise to price these consequences, just as Dr. Friedman would. But it's also important to balance this by pricing the opportunities that the exercise of corporate free speech can create.
This same approach would probably also be useful in the continued debate about shareholder versus stakeholder capitalism. Those on each side of this debate price the consequences from their point of view. If you don't focus on shareholders, their return on investment will drop. If you don't focus on stakeholders, you will lose the war for talent and customers. Of course, the smartest approach is to price both into your risk and reward analysis.
These aren't moral issues. They're business issues.