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Corporate Political Spending: The Risk, The Solution


 The Risk

 

Companies are not required under current law to report or account for their soft money political donations or their payments to trade associations and other tax-exempt organizations, such as “social welfare” 501(c)(4) groups, that are used for political purposes.  

 

The problem of unaccountable corporate political spending was exacerbated by the U.S. Supreme Court’s Citizens United v. Federal Election Commission decision (2010), which unleashed a surge in corporate political spending. Companies now face greater pressure to spend corporate dollars either directly or indirectly through trade associations and (c)(4) groups. Moreover, these groups are not required to report funds they receive for political activity, including ads.

 

As a result, hundreds of millions of corporate dollars flow into the political process, including state judicial elections and initiative and referenda campaigns, often without controls, board oversight, or public knowledge. A substantial portion of this money supports candidates, issues and activities that are contrary to the publicly stated values, policies and practices of the contributing companies.  

 

This spending can embarrass companies and create serious risks for shareholders.  “[P]olitical spending always involves an element of the unknown, and these expenditures and activities can represent risks to corporations, their boards, and their shareholders,” the Handbook on Corporate Political Activity, published by The Conference Board, cautioned in 2010. “Companies need to rigorously evaluate the means, rewards, and risks of political spending or they could suffer penalties, prosecutions, and tarnished reputations as a result of political spending activities.” The Conference Board is the preeminent business research organization.

 

The Solution

 

Companies are dealing with this problem by adopting political transparency and accountability. 

A growing number, including many in the S&P 100 have agreed to disclose and require board oversight of their political spending with corporate funds. (Click here to view corporate leaders that disclose their political spending.) Indeed, it is fast becoming a basic corporate governance standard. Institutional Shareholders Services Inc. (ISS), the most influential proxy advisory service, revised its proxy voting policy in November 2011 to recommend generally for a vote in favor of political disclosure. The previous ISS policy was to recommend for disclosure on a case-by-case approach.

 

Shareholders and directors strongly support disclosure as demonstrated by two Mason-Dixon Polling & Research surveys commissioned by the CPA in 2006 and 2008.

 

In 2011, a committee of The Conference Board examined corporate political spending. It reported, “At a time when public trust in U.S. corporations is at near-record lows, and both companies and consumers are struggling in a difficult economy, demonstrating greater disclosure and accountability can help corporations build public trust and investor confidence—and strengthen their relationships with the people they count on to support their business and contribute to their success.”

 

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