September 22, 2021

Blog: How do companies address governance issues for corporate political activity?

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In the last couple of years, many CEOs have felt the need to voice their views on political, environmental and social issues, such as racial justice and voting restrictions. For example, after the murder of George Floyd and resulting national protests, many of the country’s largest corporations expressed solidarity and pledged support for racial justice. After January 6, a number of companies announced that their corporate PACs had suspended—temporarily or permanently—their contributions to one or both political parties or to lawmakers who objected to certification of the presidential election. However, as The Conference Board has recently stated, in the current “era of intense political polarization in the United States, and with the immediacy, ubiquity, and (often) inaccuracy of social media, companies are subject to ever-greater scrutiny for their political activities.” In this article, Deloitte and the Society for Corporate Governance report on a survey they conducted in July 2021 about companies’ approaches to publicly addressing controversial social and political issues. As the authors note, “taking a stance publicly on controversial or sensitive topics poses both risks and opportunities, including alienating or appealing to key stakeholders; enhancing or damaging the corporate culture; and eroding or building trust and brand reputation,” leading some companies to consider more systematically how they approach public engagement on these types of issues.

Survey respondents were all in-house members of the Society for Corporate Governance. Respondent companies were in following industries: 33% consumer; 29% energy, resources, and industrials; 22% financial services; 9% life sciences and health care; and 7% technology, media, and telecommunications. The number of responses to each question ranged from 74 to 115. As of December 2020, public company respondents consisted of 50% large-cap (> $10 billion); 37% mid-cap ($2 billion to $10 billion); and 13% small-cap (<$2 billion).

The survey showed that, for almost half (48%) of respondents, no officer or director spoke out on a social, environmental, political or other public policy issue (“public policy issues”) last year. However, 45% of respondents indicated that the CEO spoke out, and 14% reported that another officer or director made a statement. Large-cap companies spoke out most often (66%) relative to mid-caps (41%), small-caps (7%), and private companies (50%). According to the survey, racial justice was addressed most often, followed by social justice and environmental issues. With regard to selection of a designated spokesperson, 66% of all public companies designated the CEO, with the head of corporate communications next (30%). However, almost 30% of small-caps did not designate anyone, and 33% selected a different spokesperson depending on the nature of the issue.

SideBar

In this article from the WSJ, two business school professors gave us their views, based on interviews and research, on the right way and wrong way for CEOs to express activist views, especially given the risk that companies can, in some cases, face backlash from consumers and others.

The authors identified three instances when, in their view, it makes the most sense for a CEO to weigh in on a controversial issue:

First, when the CEO’s employees provide a “nudge” to the CEO to speak out on the issue. However, the authors caution, the CEO should be sure to assess the level of employee support and opposition, given that some positions may alienate some groups of employees and potentially “undermine organizational culture.” Especially recently, there have been notable instances when employee pressure has received substantial public attention and had a significant impact on corporate decisions.
Second, when the public statement won’t be viewed as hypocritical (in light of company practices) or a “cheap publicity stunt” (because of the strong connection to the CEO’s personal values and the company’s corporate values).
Third, when the issue is still hotly debated and the CEO’s voice can make a difference; remaining silent and waiting for a “safe” time to speak out can be interpreted as “an endorsement of the status quo.”

To make activist statements most effective, the authors recommended the following:

Plan ahead for the possibility that the CEO could be asked to express his or her view on a controversial topic by assembling a “team of employees, board members and even outside experts to map out how [the CEO] will—or won’t—respond to the next big political firestorm” and “war game” various scenarios.
Part of that planning should include anticipating the possibility of backlash from customers or employees, such as consumer boycotts or employee protests and walkouts. To that end, “[f]iguring out whether opponents or proponents will have a bigger impact on the issue at hand—and on your company’s reputation—is typically more art than science today. More detailed data on customers’ and employees’ beliefs and values would be needed to better predict responses to CEO activism.” CEOs should identify and monitor key performance indicators to continue to assess the impact of the statement.
Work with the corporate communications team, who can provide informative data and strategic advice, especially if the CEO lets the team know which issues are of most importance.

See this PubCo post.

Responses were fairly mixed to the question of whether a particular policy or document guides the decision about whether to speak out on public policy issues. Among public companies, 31% reported having a specific framework, while other public companies pointed to codes of ethics and corporate governance guidelines, among other things. For about 30%, there was no specific policy or document that addressed the question. WAs board approval of the policy obtained? Only for about 15% of large-cap and small-cap companies and 3% of mid-caps. Few of the policies or documents actually addressed board involvement.

With regard to oversight of the CEO or other spokesperson, respondents indicated that “70% of large-caps and 63% of mid-caps have a management-level committee, group, or individual(s) overseeing this area, compared with 21% of small-caps.” For large-caps, the role of the oversight committee was assessing risks and benefits of speaking out, identifying which issues are “connected to the company’s interests and core corporate values” and which issues the company “should consider taking a position on.” Mid-caps focused oversight on determining the issues “connected to the company’s interests and core corporate values” and assessing and preparing the company’s response to an issue. Oversight among small-caps concentrated on assessing and preparing the company’s response to an issue, determining the issues that the company “should consider taking a position on,” seeking a broad internal consensus and assessing and managing any resulting impact from the position taken.

During the past year, the survey indicated, boards or board committees of 45% of large-caps, 34% of mid-caps and 14% of small-caps discussed whether or the circumstances when the company or its representatives should speak out on public policy issues. At 45% of the public company respondents, the CEO may speak out on public policy issues without approval from the board or any board committee. Approval was required by the nominating and governance committee for 25% of public company respondents, the full board and committee for 20% and another 20% reported that oversight is issue-dependent. Among public companies, 57% memorialize board/committee oversight in committee charters and 42% in corporate governance guidelines.

According to the survey, 49% of public company respondents were contacted by major shareholders to request engagement on public policy issues, including 68% of large-caps, 28% of mid-caps and 38% of small-caps. As to other stakeholders, such as customers, employees or business partners, 18% of public companies reported having received a request for engagement on public policy issues, including 26% of large-caps, 7% of mid-caps and 15% small-caps. The survey showed that, most often, stakeholders requested engagement on “ESG, climate change, and DE&I; some cited lobbying, legislative initiatives, and political contributions.”

SideBar

How do companies navigate the terrain of political activity and public scrutiny while staying true to their core values? In this report, “Under a Microscope: A New Era of Scrutiny for Corporate Political Activity,” The Conference Board attempted to address this complicated issue. After January 6, The Conference Board held a roundtable to discuss corporate political activity and conducted a survey of 84 large public and private firms on the responses of those companies and their employee-funded PACs to the events of January 6. The roundtable and the survey yielded a number of insights on these issues for companies, discussed at length in this PubCo post.

In the report, The Conference Board also advocated that, to minimize legal and reputational risks and protect shareholder value, companies should at least take steps to ensure that rigorous governance processes are in place applicable to the full range of corporate political activity. The report indicated that companies have recently increased their oversight of political spending to a significant extent, “including general board oversight and board committee review of direct company (as opposed to PAC) contributions/expenditures, payments to trade associations and other tax-exempt groups, and committee approval of other direct political expenditures.”

The report identifies four specific ways that companies can enhance governance at the management and board levels related to political activity:

In addition to oversight of political contributions, consider board and management oversight of lobbying as well, including, at the management level, “robust approval and oversight policies that set forth the criteria for determining what issues they are going to lobby on and identifying the top lobbying issues. It can serve as a reference and proof that a lobbying activity was in line with the policy, in case of any blowback.”
Consider establishing an internal management committee to oversee and vet political spending and lobbying activity, as well as decisions about whether, when and how “to take a stand on social issues—and make sure they are aligned with the company’s values.”
Provide adequate resources (including outside counsel) for review and legal clearance of corporate political contributions, as “different types of spending at the state level bring different layers of scrutiny.”
If the board and CEO are not precluded from political spending, the company should provide regular guidance about state and federal “pay-to-play” laws and request that the CEO and directors keep the company apprised of any contributions they make.

[View source.]

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.