Has all of the current political unrest and social upheaval had any impact on the drive for political spending disclosure? Apparently so, according to the nonpartisan Center for Political Accountability, which reports in its June newsletter that support for shareholder proposals in favor of political spending disclosure hit record highs this past proxy season.  But one risk potentially arising out of political spending is reputational, which could fracture a company’s relationship with its employees, customers and shareholders. As companies and CEOs increasingly offer welcome statements on important social issues such as climate change, healthcare crises and racial injustice, the current heated political climate has heightened sensitivity to inconsistencies and conflicts between those public statements and the company’s political contributions.  When a conflict between action in the form of political spending and publicly announced core values is brought to light, will companies be perceived to be merely virtue-signaling or even hypocritical? To borrow a phrase from asset manager BlackRock, if the public perceives that these companies are not actually doing “the right thing”—even as they may be saying the right thing—will they lose their “social license” to operate? (See this PubCo post.) CPA’s brand new report on Conflicted Consequences explores just such risks.

The CPA June newsletter reports that support for shareholder proposals in favor of political spending disclosure hit record highs this past proxy season.  For proposals using the CPA model resolution submitted to shareholder votes at 22 companies, the average vote in favor was 41.9%, up from an average of 36.4% last year.  What’s more, the proposal received majority votes in favor at four companies plus one tie (50%) vote, and over 30% of the vote at 18 companies.

The CPA newsletter also notes that, notwithstanding the growth of support for ESG proposals in general, “CPA’s resolution captured the highest average support of all ESG resolutions filed at more than one company.”  For eight companies, the proposal was withdrawn prior to the vote, and CPA and its “shareholder partners”—which, notably, now include the prolific John Chevedden and James McRitchie—negotiated “disclosure and accountability agreements” with those companies, with the result that there are now an aggregate of 179 of these agreements.

In its newest report, Conflicted Consequences, the CPA looks at corporate political spending through non-profit, tax-exempt “527” organizations, such as state party leadership and legislative campaign committees and the governors and attorneys general associations. These organizations accept “contributions from a variety of sources and then spend it to advance a broad political agenda.” Once a company has contributed to a 527 group, the corporate and other funds are pooled and then channeled to state and local PACs and candidates, to “dark money” groups and to other national 527 groups. As a result, companies no longer control the use of their funds.  The groups determine how the money is used, they control the message and decide which candidates or issues to support, regardless of the contributor’s own goals and intentions.

To compile fundraising data, CPA examined reports filed by 527 groups with the IRS, and used detailed money maps to track millions of dollars donated to and spent by 527 groups in support of various initiatives. The report observes that there is a “broad misconception that publicly held corporations are not dominant players in the political spending game. The opposite is true.” Over the last 10 years, the CPA found that hundreds of millions of dollars have been poured into six large partisan groups by publicly held companies and their trade associations, destined to help elect state officials who drove “new agendas that have transformed state and national policy.”

As indicated in the forward to the report, a number of the intermediate organizations that are financed through 527s “often direct that money in ways that belie companies’ stated commitments to environmental sustainability, racial justice, and the dignity and safety of workers.” For example, the report discusses the use of 527 funds, donated by companies that had spoken out in favor of preserving the Paris climate accord, to support political groups that worked in opposition to domestic climate initiatives. Similarly, the report highlights companies that voiced their concern for racial injustice and support of diversity, but, through their donations, ended up supporting legislators who were instrumental in implementing racial gerrymandering. These and other conflicts were exposed in various media reports.  As a result, companies and their boards need to be aware of an “increasing risk…from their political spending. When corporations take a public stand on such issues as racial injustice or climate change, the money trail… can lead to their boardroom door. It can reflect a conflict with a company’s core values and positions” and lead to sometimes humiliating, and perhaps even toxic, unintended consequences.

The report suggests that donations to 527s appear to be particularly fraught with peril and merit special attention, precisely because, as discussed above, once the contribution is made, the company essentially cedes control over the use of the funds. As discussed in CPA’s 2018 Collision Course report, to address this heightened risk and avoid the potential embarrassment—or worse—of conflicting messages and other blowback, companies need to consider adopting “corporate governance safeguards to align their political activity with their brands, core values and positions.”  Few companies will be in agreement on all points with politicians to whom donations are made, but, the report advises, they need to perform a due diligence analysis of the risks associated with any donation, including how the funds will be used and with whom the company is being associated by virtue of the donation.

If companies do decide to make political contributions—and many would argue that they should not—they “can address loss of trust and mitigate heightened risk by adopting transparency and accountability policies and practices for their political spending.” To that end, the report cites recommendations from the “Board Member’s Guide to Corporate Political Spending,” which CPA co-authored in 2015 and published in the Harvard Business Review. The Guide advocates that directors carefully consider whether the company should engage in political spending, whether to disclose it and how the board should oversee it.   Below are  recommendations from the Guide:

“Directors need to know and understand the:

• ‘Kinds of risks posed by political spending.
• ‘Red flags, such as failure to follow company policies on making contributions; contributions that conflict with company values, positions or business strategies [both short-term and long-term]; contributions that hint of quid pro quos for political favors; and changes in company spending patterns.’”

“Directors need to set clear and concise policies that:

• ‘Specify what kinds of political spending the company will, or will not, engage in.
• ‘Outline decision-making procedures management is required to follow regarding political spending, including a requirement that these decisions be broadly discussed within the executive suite before the company makes a political contribution or expenditure.
• ‘Require disclosure of any political spending. …Transparency is broadly accepted today as part of good corporate governance, as seen in the steady increase of companies adopting disclosure and accountability policies. The Business Roundtable, a group that represents the CEOs of major U.S. corporations, wrote in its 2016 “Principles of Corporate Governance,” “To the extent that the company engages in political activities, the board should have oversight responsibility and consider whether to adopt a policy on disclosure of these activities.”
• ‘Provide for board oversight of political spending, including semi-annual reports made to a specified board committee (comprising independent directors) and, at a minimum, an annual review by the full board.
• ‘Require third-party groups to report to the specified board committee how they plan to use the company’s money and to identify their other contributors. To evaluate risks, directors need to know how the company’s money will be used and with whom the company is being associated.’”

“Director-executed political spending review should include:

• ‘Determining the impact of political spending on stakeholders, the firm’s long-term interests, on broader issues in which it may have a stake, and the needs of the society which the company operates.’”

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