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Nov 08, 2015

Is your board on top of political spending?

Lack of accountability for political contributions since Citizens United ruling makes it all the more critical that directors track how a company's money is being spent

A week after state and local elections were held across the US and as campaigns aiming toward national elections next November start to accelerate, it’s an apt time to look at some of the governance concerns around the political contributions that many companies make.

An article published last week in the Harvard Business Review, titled ‘A board member’s guide to corporate political spending’, cites the risks that come with the additional freedom bestowed on public companies by the Citizens United decision, affirming their right to ‘engage in the political process in instrumental terms’ in the name of maximizing shareholder value. The article reminds us that board members in various industries ‘have been stung by media reports that political intermediaries used corporate money to help fund causes or candidates averse to a firm’s business interests or its espoused values and positions.’ The article goes on to share guidance for board members, drawn from the Conference Board’s Handbook on Corporate Political Activity, the CPA-Zicklin Index and assorted other sources. It’s something corporate secretaries and others taking care of the governance function within companies should also have a look at as they start crafting disclosures for their 2016 proxy statements.

Last week, I caught up with Karl Sandstrom, senior counsel in the Washington, DC office of Perkins & Coie, who co-authored the HBR piece along with Bruce Freed, president of the Center for Political Accountability, and Constance Bagley, senior research scholar at Yale Law School.

The problem with campaign finance law since Citizens United is a lack of individual accountability, Sandstrom says. Super political action committees (Super PACs) are allowed to accept unlimited contributions and make unlimited independent expenditures. While companies’ direct contributions to a Super PAC must be disclosed, indirect contributions – to an industry trade association or a 527 political committee such as the Republican or Democratic Governors Association, for example – don’t have to be disclosed. ‘Prior to Citizens United, all contributions could be traced back to an individual making a voluntary decision to contribute,’ Sandstrom explains. ‘Once you move to artificial entities making contributions, you’ve lost that individual accountability ‒ because who’s actually making the contribution?’

That’s why Sandstrom believes it’s critical for companies to learn how their money is spent, so that there is accountability and money isn’t spent in ways contrary to companies’ interests. Take the pharmaceutical industry, which is more dependent on government funding of scientific research than any other and benefits more from contraceptive sales than any other. ‘But consistently their money was used to fund candidates who wanted to cut back on research funding and who were opposed to contraceptives,’ Sandstrom says. ‘It’s fine for pharma [trade associations] to take that position, but shouldn’t they actually be reporting back to their members so they don’t have that plausible deniability about how the money is spent?’

Sandstrom says he sees a broad range of institutional investors, beyond public pension funds, other employer pension funds and socially responsible investment funds beginning to consider what’s in their best interests when it comes to the policies and practices of their portfolio companies. In particular, a fund that’s broadly diversified should be using disclosures to determine whether a company it’s invested in may be ‘relying too much on trying to obtain favorable government decisions or trying to obtain an unwarranted market advantage over another company or companies that it holds.’

Moreover, he believes disclosures of political spending provide an insight into what a company’s strategy is and how it seeks to accomplish it. He cites Enron, ‘which was so dependent on a favorable regulatory environment. That should go in the mix of all the things you [evaluate when] investing in companies.’

The results of the fifth annual CPA-Zicklin Index of Political Disclosure and Accountability, released last month, show that 52 percent (259) of the S&P 500 companies have a detailed policy governing political spending on their websites; a further 35 percent (176) have a brief or vague policy. The latest results also show steady improvement in the overall average score among the 83 companies studied by the index since 2011, from 45.2 to 71.3.

Board oversight, however, appears to be lagging far behind. Just 17.3 percent of respondents to last year’s (2014-2015) governance survey by the National Association of Corporate Directors (NACD) said their boards routinely oversee political expenditures related to PACs. In NACD’s latest survey (for 2015-2016), 2 percent of respondents say their board has done something in response to shareholder pressure or requests to begin disclosing political contributions, versus 3.8 percent in the 2014-2015 survey and 2.8 percent in the 2013-2014 survey.

Corporate secretaries can do their boards a big favor by asking them to reflect on the oversight they currently provide to their companies’ political activity to make sure they know what causes their shareholders’ money is being spent on.