Corporate Social and Political Engagement: An Introduction

Should corporations take public stances on social issues? Should they make contributions to political action committees or political parties? Under what circumstances do such actions create issues for corporations and their boards? 

 

These questions are timely in an era marked by deep political divisions in the United States. Many major corporations have spoken out on matters of public controversy, and citizens have taken notice.

 

For our purposes, the term “social engagement” means engagement in problems affecting societal groups, such as discrimination, inequality or violations of human rights (often called “social justice” issues). The term “political engagement” refers to financial contributions made through political action committees (PACs) to support campaigns and elections for public office, as well as to the lobbying of government officials. It is common practice for corporate PACs to make donations to political parties. Corporate PACs, which are funded by employee contributions, often have a separate governing entity that decides which candidates to support.

 

While many corporations give to candidates on both sides of the aisle, the total dollar amount of donations since at least 2000 has been higher for Republicans (except for 2010, when equal amounts were given to Republicans and Democrats). Corporate support for Republican candidates tends to be higher because in general Republicans favor lower taxes for corporations, and this has been a critical issue for corporate finances. But after the storming of the Capitol building on January 6, 2021, well over 100 major corporations announced that they would pause or stop political contributions to the candidates (all of whom were Republicans) who voted against certifying the election of Joe Biden as President. Conversely, some conservative Republican candidates have stated that they would not accept contributions from such “woke” companies.

 

Since then, many corporations have resumed donations to candidates who opposed certification of the Biden election. And many politicians have begun to accept them. The resumption of these donations has occurred quietly, without press releases.

 

The line between social and political can be gray when it comes to political speech. Political parties (and their candidates and appointees) strive to associate themselves with social issues, and politicians have the power to pass laws and support regulations that affect society. For the purpose of board oversight of these domains, however, it is important to distinguish between the concepts of “social” and “political.” Not all social issues become partisan, and not all political contributions are motivated by social issues. Therefore, we will refrain from using the terms interchangeably — although for some areas they must be discussed in tandem.

    

Clearly, corporate speech straddles the realms of social and political engagement. The questions to be resolved here are, first, does a company have the legal right to speak out on social and political issues, and second, does a company have a moral responsibility to do so?

 

Rules and Regulations RulesandRegulations.mp3 Boards need to oversee corporate procedures for the regulated aspects of political activism. Here is a brief guide to the applicable rules. As in all matters of legal compliance, boards should seek the advice of qualified counsel.    Lobbying rules  Corporate lobbying must be disclosed in conformity with the Lobbying Disclosure Act  (LDA) of 1995 and the related guidance regularly issued by the Secretary of the U.S. Senate and the Clerk of the U.S. House of Representatives. The Lobbying Disclosure Act, as amended, requires lobbyists to file quarterly disclosure reports and semiannual reports on certain political contributions. The law also requires the Government Accountability Office (GAO) to report periodically on corporate compliance with this law. In the most recent (April 2021) report, the GAO finds that 29 percent of lobbyists did not report all of their previous government (aka “covered”) positions.   Companies file a quarterly report (Form LD-2) of U.S. lobbying activities. The threshold for reporting is a quarterly expenditure of $14,000 or more as of January 2021. A typical report provides an estimate of total expenditures for U.S. lobbying, including internal expenses, payments to lobbying firms (which have their own disclosure requirements) and portions of industry association dues attributable to lobbying activities.   Campaign contribution rules – Company PACs   The Federal Election Campaign Act (FECA) outlines what contributions are allowed under the law.     Political campaigns may not accept contributions from the treasury funds of corporations or from any organization that is incorporated, including a for-profit business, a nonprofit, a labor union or even a local government. A campaign may, however, accept contributions from PACs established by corporations. But while direct campaign contributions are banned, corporations may make certain election-related contributions that benefit political candidates, as a result of revisions to campaign finance law made in 2014 following the 2010 U.S. Supreme Court decision in Citizens United.   Political contributions are filed on Form LD-203. In its April 2021 report, the GAO found that 8 percent of corporations filing Form LD-203 underreported their political contributions (GAO-21-375, Accessible Version, 2020 Lobbying Disclosure: Observations on Lobbyists' Compliance with Disclosure Requirements).

Fundamental to the first question is the corporation's status as a legal person with rights of free speech. The U.S. Supreme Court decision in Citizens United v. Federal Election Commission is instructive here. The case involved a conservative political group that produced a documentary critical of presidential candidate Hillary Clinton. The Court, in a 5-4 decision, found that such expenditures were protected under the U.S. Constitution. Although federal election law prohibits “electioneering communication” by corporations and unions, and also bans direct political contributions to candidates, the Court called the film an exercise of free speech. 

 

Citizens United was only one in a long line of cases considering corporations as legal persons. Before this case, there was a legal precedent for equating money with speech, as established in Buckley v. Valeo, 424 U.S. 1 (1976). Just two years later came the landmark case First National Bank of Boston v. Bellotti, 435 U.S. 765 (1978), in which a footnote to the decision stated, “It has been settled for almost a century that corporations are persons within the meaning of the Fourteenth Amendment.”

 

The upshot of these cases is that corporations, like individual persons, have the right to free speech. Therefore, federal campaign law cannot prevent corporations from making contributions to certain types of political committees — also known as political action committees (PACs), such as super PACs and accounts held by hybrid PACs. It is clear that, based on existing law, corporations do have the constitutional right to engage in social and political speech.

While corporations have the right to exercise free speech, does that mean they should exercise that right? There are at least two distinct schools of thought on this question.

 

One says that social or political engagement, while allowed legally, may not be optimal ethically unless it contributes to a company's financial performance. According to this viewpoint, there is a per se benefit in positive financial performance, since businesses have always benefited society to some degree. Corporations create and sell goods or services that improve the lives of their customers. They employ workers, providing training, wages and benefits. They pay taxes. They raise debt or equity capital and provide returns to their creditors and owners. And in all of this they conform to laws that reflect the will of the body politic at the local, state and national level. Thus, even without a conscious attempt to be “socially responsible,” corporations bring social benefits. Social and political engagement is a distraction from this purpose.

 

But another school of thought sees corporations as having a public purpose beyond these benefits to their own shareholders and stakeholders. According to this viewpoint, corporations are not creatures of private interests that happen to produce social benefits; rather, they are creations of governments (and thus of the sovereign people) that charter them, and to whom they are ultimately beholden. Historian Richard Sylla reminds us of these words from Theodore Roosevelt: “Great corporations exist only because they are created and safeguarded by our institutions, and it is therefore our right and duty to see that they work in harmony with those institutions” (Richard Sylla, “U.S. Politics and Corporate Speech: A Two-Edged Sword,” Directors & Boards, Second Quarter, 2021). Furthermore, many corporations are taking into account not only their own immediate stakeholders, but also the planet in general. They publish sustainability reports detailing their environmental, social and governance (ESG) accomplishments across a wide variety of metrics. While proactive ESG practices can improve returns to shareholders, these returns are not always emphasized in sustainability reports.  

 

Corporate boards are attuned to these trends and their nuances. Directors & Boards has covered corporate social and political subjects since its founding days, most recently in the publication's special issue on political engagement, headlined “Red Corporation, Blue Corporation? Political Speech Becomes a Board Issue” (Second Quarter, 2021). Similarly, director institutes around the world have paid close attention to social and political issues, conducting surveys both within individual countries and together. The Global Network of Director Institutes 2020-2021 Survey Report: Board Governance During the Covid-19 Crisis found that 57 percent of directors worldwide agreed with the statement, “After the crisis, there will be a greater emphasis at the board level on environmental and social issues than there was before.” This is not surprising, since directors are elected by shareholders who have been more interested in social issues in recent years, with some 2,400 public-interest proposals filed by shareholders in the past decade. 

 

As for board attention to purely political engagement, the trend here is also strong. The 2021 CPA-Zicklin Index of Corporate Political Disclosure and Accountability found evidence of stronger board and committee oversight of company policy, political expenditures and trade association payments. Five years ago, 111 of the Fortune 500 companies had such policies; by 2020, this number had increased to 162 companies.

 

Potential rewards for political engagement include strengthening reputation with constituents who care about an issue and potential for positive press coverage that can enhance the company's general brand. Apple, Ben & Jerry's and Starbucks have affiliated themselves with liberal themes, and their customer base accepts that. Conversely, Chick-fil-A, Goya and Hobby Lobby are known to embrace conservative themes. These affiliations, which are consistent with the branding of the companies, have not harmed shareholders. Note, however, that these prominent examples are all in the consumer discretionary sector. Such a branding strategy might be riskier for companies in other sectors, such as energy or financial services. 

 

Potential risks for social stances include possible negative comments on social media and boycotts by consumers on either end of the political spectrum. A recent Statistica survey showed that half of the 1,528 consumers polled had at one point or another boycotted a company (or taken other actions against it) for practices seen as unethical. There is also a risk of real or perceived corruption of company leaders. As stated by Transparency International, “corporate political engagement is a significant risk area for bribery and corruption, and public perceptions of lobbying and corporate influence in the political process threaten reputational damage.”