How Should We Approach Corporate Political Activity? – Corporate/Commercial Law – United States – Mondaq News Alerts

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How Should We Approach Corporate Political Activity?

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A new piece in the NYT,
“Corporations, Vocal About Racial Justice, Go Quiet on Voting
Rights,” starts off this way: “As Black Lives Matter
protesters filled the streets last summer, many of the
country’s largest corporations expressed solidarity and pledged
support for racial justice. But now, with lawmakers around the
country advancing restrictive voting rights bills that would have a
disproportionate impact on Black voters, corporate America has gone
quiet.” The author is talking about new voting laws just
passed in Georgia and the reluctance, with some exceptions, of the
largest corporations to say anything or do anything-beyond anodyne
statements of support for voting rights in general-that might
pressure the state to back down, as major corporations did when
several states passed their infamous transgender bathroom bills and
many companies threatened to move business out of those states. As
the NYT observed, the “muted response-coming from
companies that last year promised to support social
justice-infuriated activists, who are now calling for
boycotts.” Last night, the NYT reported that two of the largest
corporations in Georgia have abruptly reversed course and issued
statements in opposition to the voting bills after a large group of
prominent Black business leaders called on companies “to publicly oppose a
wave of similarly restrictive voting bills that Republicans are
advancing in almost every state.” In an interview with the WSJ, one of those business leaders
emphasized that this “is a nonpartisan issue, this is a moral
issue.” This battle is expected to continue as other states
enact similar legislation, not to mention potential fights over
guns, immigration and climate, to name a few. How do companies
navigate the terrain of political activity and public scrutiny
while staying true to their core values? In this new report,
Under a Microscope: A New Era of Scrutiny for
Corporate Political Activity
,”
The Conference Board
attempts to address this complicated issue.

The Conference Board report begins by reminding us that, while
companies have long participated in politics through lobbying and
political contributions, 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.”  Some companies have responded by limiting
or stopping their political activity, including spending, while
others have turned to strictly nonpartisan efforts. But, with many
companies under pressure from a variety of stakeholders on
political, environmental and social issues, banning political
activity altogether may not be realistic or consistent with the
core values of the company.

SideBar

According to the Global Chair of Reputation at Edelman, the
expectation that CEOs will be leaders of change is very high. The
2021 Edelman Trust Barometer showed that 86%
of those surveyed agreed that they expect CEOs to publicly speak
out about one or more of these societal challenges: pandemic impact
(59%); job automation (51%); societal issues (43%) and local
community issues (40%). In addition, 68% believe that CEOs should
step in when the government does not fix societal problems, 66%
believe that CEOs should take the lead on change rather than
waiting for government to impose change on them, and 65% believe
that CEOs should hold themselves accountable to the public and not
just to the board of directors or shareholders. Similarly, in his
2019 annual letter to CEOs, BlackRock CEO
Laurence Fink focused on the responsibility of corporations to step
into the breach created by political dysfunction: “Unnerved by
fundamental economic changes and the failure of government to
provide lasting solutions, society is increasingly looking to
companies, both public and private, to address pressing social and
economic issues. These issues range from protecting the environment
to retirement to gender and racial inequality, among others.”
In the absence of action from government, he counseled CEOs,
“the world needs your leadership.”  (See this PubCo post.) 

After January 6, when 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, 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. (For a discussion of the survey
results, see this PubCo post.)  The roundtable and the
survey yielded the following insights and advice for companies:

  • “Prepare for backlash. Don’t
    expect a letup in scrutiny (or occasional outrage) about your
    firm’s or PAC’s political activity. Have a clear set of
    standards and guidelines that you can use in making and defending
    any positions you take-whether through a statement from your CEO,
    political contributions, or lobbying efforts.
  • “Align political activity with corporate
    values. 
    Aligning politics and values is much easier
    said than done because, for example, companies or their PACs often
    support candidates whose positions do not fully align with their
    stated corporate values, and companies may advocate policy
    positions that are not evidently in the interests of their
    stakeholders, such as employees and customers. But there are ways
    to achieve greater alignment:

    • Keep it simple-the more complex your political activity, the
      more difficult it can be to manage reputational and other risk.
      Consider, for example, giving to candidates only through PACs and
      not via direct corporate contributions, and limiting contributions
      to third-party organizations.
    • Thoroughly vet third-party organizations to which you donate
      money, including the governance processes in place to control their
      activities.
    • Consider involving the corporate citizenship function or
      executives in reviewing political activity.
    • Adopt (or have your PAC adopt) a policy for political
      contributions that incorporates your company’s and your
      employees’ values as part of the framework for managing
      political spending.
  • “Ramp up educational and engagement efforts with
    stakeholders.
     Corporate political activity is
    multifaceted, of growing importance to multiple stakeholders, and
    likely an ongoing source of controversy and risk. This reality
    places a premium on not just educating, but appropriately engaging,
    key audiences.

    • Augment board oversight. Over half of
      S&P 500 companies now have board oversight of their corporate
      political contributions and expenditures. While boards have
      traditionally focused more on political contributions than on
      lobbying activities, companies should consider what kind of role
      boards should play with respect to lobbying (and other forms of
      political activity). Their role might include approving broad
      principles and processes for corporate political activity.
    • Expand disclosure to investors. Investors
      increasingly care about political activity, particularly as a
      source of risk. Average support for political contributions and
      lobbying proposals went from 33.6 percent in 2019 to 34.5 percent
      in 2020, when six proposals received majority support. Expect even
      more support for such proposals in 2021. In response to investor
      interest, companies have been ramping up their disclosure:
      three-fifths of S&P 500 companies now have some level of
      political disclosure. Of the Center for Political
      Accountability’s 378 core companies (companies that
      have been on the CPA-Zicklin Index since 2015), over 200 now
      disclose contributions to candidates, parties, committees, 527
      groups, independent expenditures, and ballot groups, and a growing
      number of companies disclose contributions to trade and 501(c)(4)
      organizations. But your company should prepare to provide a
      comprehensive overview of its types of political activity and the
      policies and controls in place as part of engagement during the
      2021 proxy season, especially in the wake of the Capitol riot and
      objections to the certification of the presidential election.
    • Involve employees.  Employees often
      expect companies to take stands on issues, which may be politically
      divisive and may not be related to the firm’s business or align
      with its core corporate values. It’s vitally important to
      educate your employees-and, indeed, the general public-about your
      company’s activity. In terms of engagement, companies have been
      successfully bringing employees into select conversations with
      policymakers, which educates employees about the process and brings
      extra authenticity and effectiveness to conversations with
      legislators.
  • “Increase coordination internally and with third
    parties. 
    It’s important to ensure that the
    multiple ways your company can engage in political activity are
    coordinated. You don’t want your CEO to take a stand on an
    issue, only to discover that it’s at odds with your PAC’s
    political contributions or the work of one of your third-party
    lobbyists. Coordination is particularly important with respect to
    lobbying. New state and local regulations are forcing more and
    faster disclosures about lobbying activities, sometimes within 48
    hours. There’s reputational exposure if a consultant discloses
    activity on a sensitive topic and the company’s legal,
    government relations, and communications teams are caught off
    guard.
  • “Use the resumption of PAC contributions as an
    opportunity for education
    . Corporate PACs took
    unprecedented action in the wake of the January 6 events, but
    pausing contributions by PACs may have been easy compared to
    resuming them. Three areas for attention when it comes to resuming
    PAC giving:

    • Clarifying the role of PACs. Company-sponsored
      PACs are funded by employees, not by corporate funds. But the
      press, employees, and others conflate corporate giving and PAC
      giving. To some extent, that’s understandable given the legal
      authority companies have to create, administer and, if they wish,
      determine who receives funds from the PAC. Leading up to, and while
      announcing, any resumption of PAC contributions, your company can
      focus on educating employees and others about the purpose and
      governance of PACs.
    • Clarifying the process for publicizing PAC
      decisions
      . The January 6 events highlighted the challenges
      in reconciling the sometimes-conflicting views of the legal,
      communications, and government relations functions, especially when
      it comes to announcing PAC decisions. Communications executives
      often tended to lean in favor of
      the company making the announcement about PAC
      contributions, while the legal and governance functions focused on
      preserving the distinction between corporate and PAC activity.
      Before your company’s PACs resume making contributions, it may
      be helpful to clarify who makes the announcement and who is
      involved in the process.
    • Updating criteria for PAC giving. Most PACs
      have not yet figured out the steps they will take before resuming
      contributions, but options include deeper vetting of potential
      recipients and Incorporating criteria relating to: a) supporting
      democratic processes; b) opposing violence; and c) aligning with
      company values.”

The Conference Board emphasizes how vulnerable companies are to
reputational risk if their political activity is inconsistent with
their core values, especially when it comes to donations to
501(c)(4) organizations or other third parties, where “it is
not always clear where that money is going, and it may very well
end up in a cause that clashes with the company’s core values
and positions. Indeed, some US companies have been accused of
hypocrisy as a result of their political spending. These unintended
controversial contributions can harm a company’s relationship
with its customers, employees, and communities, and thereby have a
negative impact on the bottom line.”  The report
advocates that companies perform “case-by-case due
diligence” of the recipient organizations, understanding who
is involved in the third party, its decision-making governance
mechanisms and its plans for donations.

SideBar

A report from the Center for Political Accountability, Conflicted Consequences, looked 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, what the message will be and which candidates or
issues to support, regardless of the contributor’s own goals
and intentions.

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.” What’s more, 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.” The report also highlighted 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, the CPA advised, 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. (See this PubCo post.)

Even though it may be quite a challenge to align political
activity with corporate values, The Conference Board advocates
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 indicates
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.

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.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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