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.” 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.