Corporate secretary plays a key role in deciding disclosure policy by advising management and board.
The Supreme Court’s 2010 Citizens United decision granted corporations the right to contribute to federal elections for the first time. Since corporations now have license to dole out political donations to various political action committees and non-profit advocacy groups, though not directly to candidates, many shareholders are clamoring for full disclosure. Shareholders are seeking transparency on how much money is being given to which politicians and trade groups in order to determine whether these donations further the company’s interests or are based on the personal beliefs and whims of the CEO.
Disclosing these political contributions publicly also creates various risks for corporations, boards and CEOs. Will shareholders organize when the corporation’s contributions aren’t to their liking? Are these contributions contrary to the corporation’s best interests? How can corporate secretaries, boards and companies best handle the lightning-rod issue of political contributions?
The Supreme Court decision has forced companies to confront the issue of whether to disclose their political contributions and post them on websites and annual reports for shareholders and investors to see. One choice is to publicize certain contributions but withhold donations to controversial and partisan political action committees, advocacy groups and trade associations. Another option is to keep everything confidential. There are no easy solutions, and every decision has a minefield around it.
An issue of risk management
Bruce Freed, president of the non-profit Center for Political Accountability, a non-partisan group dedicated to transparency on financial contributions, says that corporate support for candidates in elections is a critical issue. ‘It boils down to risk,’ he says. ‘Companies have to weigh the risks carefully when they’re making spending decisions.’ Those risks run the gamut from reputational to business and legal, and can seriously damage shareholder value.
Target exemplifies a company whose political contributions came back to haunt it. It faced a backlash when it donated money to a pro-business candidate with an anti-gay platform in July of 2010. That led to protests, a slew of negative publicity and a tarnished reputation. Ironically, Target itself had a progressive policy toward gay issues, proving that every contribution has to be vetted as to its potential effects.
Corporate secretaries play an important role in this as they interface with management and the board and deal with corporate governance issues, according to Freed. ‘We find corporate secretaries are the point of entry for dealing with disclosure issues,’ he says.
While CEOs at some companies exert extreme influence over political dollars, it’s still the board that oversees risk management issues – and increasingly, disclosure of contributions is a risk management issue. Moreover, corporate secretaries are the ones who deal directly with shareholder proposals and advise the board on what to do about them, says Rhonda Brauer, senior managing director of corporate governance at New York-based proxy advisory firm Georgeson.
Microsoft general counsel Bradford Smith also serves as the company’s corporate secretary and oversees global government affairs and policy work. Hence, Microsoft’s corporate secretary ‘has direct management oversight responsibility’, explains Dan Bross, Microsoft’s senior director for corporate citizenship.
Corporate secretaries also have to be aware of a variety of disclosure rules that vary from state to state and across different municipalities. Brendan Sheehan, former editorial director at the National Association of Corporate Directors, says that 26 states required disclosure of political spending at the time of the Supreme Court verdict, and it’s not clear if the federal decision supersedes state law.
Political contributions that are flowing into trade associations such as the US Chamber of Commerce and a variety of non-profit advocacy groups, some of which won’t divulge their actual goals, can damage a company’s reputation when the contributions are revealed. DuPont, for example, had a progressive policy regarding carbon emissions which was undermined by the Chamber of Commerce’s lobbying efforts to defeat cap and trade, Freed says.
Charles Elson, director of the University of Delaware’s Weinberg Center for Corporate Governance, says, ‘Getting publicly active comes with a cost. You take one side and alienate the other side.’ In addition, he says companies must avoid asking for a quid pro quo for contributions, which can be considered or perceived as bribery.
The message to boards is clear: be vigilant about your political contributions. ‘Corporations have to be responsible and careful about whether to offer political contributions or not,’ Elson notes.
More contributions, more shareholder action
Since the Citizens United decision, contributions to political campaigns have increased fourfold from the 2006 level, notes Sheila Krumholz, executive director of the Center for Responsive Politics. As shareholders push for disclosure, many corporations ‘don’t want the scrutiny. No one wants to repeat the mistakes of Target, the only company that got a slap on the wrist,’ she says. Even when companies post their contributions to political parties, she adds, they often withhold their donations to political action committees, which don’t have to be filed with the Federal Election Board and can thus be kept off the radar screen.
Another problem is bundling. Corporate executives and their spouses can give up to $5,000 each to candidates. Krumholz points out that Goldman Sachs donated only $10,000 to Governor Jon Corzine’s gubernatorial campaign, the maximum allowed, but executives from its partners, and their spouses, contributed over $500,000 to his campaign.
The Center for Political Accountability (CPA) has promoted disclosure as a primary strategy to ward off potential problems. Freed says 85 S&P 100 companies have agreed to disclose their political spending. Of that number, 52 are divulging their full political spending, including trade associations. To help companies assess their political contributions, the CPA has devised a scorecard consisting of 29 indicators that include company disclosure, board oversight and consistency with company policies. Boards that want to stay at the forefront of this issue, the CPA recommends, should review contributions on a semi-annual basis, ensuring the company is conducting proper risk assessment.
Disclosing political spending to shareholders often has several salutary benefits, Freed suggests. Publicizing donations for public scrutiny increases the chances that contributions will be consistent with the company’s business goals rather than based on the CEO’s personal political agenda. Transparency also encourages companies to do a more thorough job of vetting the risks associated with political contribution and screening candidates and organizations to ensure they are in sync with the company’s policies.
In August 2011, 10 corporate and securities law experts petitioned the SEC, urging it to require public companies to disclose political contributions to their shareholders rather than leaving the issue to companies’ discretion. One signer, Lucian Bebchuk, director of Harvard Law School’s Program on Corporate Governance, said, ‘Our petition suggests that the SEC already has the authority, and should use it to require publicly traded firms to make political spending more transparent.’
Brauer says disclosing political contributions can strengthen a company’s relationship with its shareholders. ‘It gives shareholders comfort that the money is being spent in a way consistent with the company’s values,’ she says.
The new normal
In the past, a company’s political giving was done away from the glaring eyes of shareholders and the media. ‘The Supreme Court case put the spotlight on political contributions,’ notes Alex Gallimore, who leads the environmental, social and governance team at Institutional Shareholder Services (ISS). A wide range of institutional, activist and smaller shareholders are paying increased attention – shareholder resolutions supporting disclosure of political contributions, which in the past garnered a single-digit response, are now gaining traction and eliciting 30 percent votes on average, according to ISS.
Indeed, Matteo Tonello, research director of corporate leadership at The Conference Board, notes that over 50 shareholder proposals regarding political spending have been introduced by activists, pension funds and asset managers against companies such as IBM, Ford, Exxon Mobil and CVS, to name a few. Hence, political spending can expose companies to a ‘material risk’, he says.
When a shareholder proposal about political contributions is initiated, Brauer meets with the corporate secretary to discuss how the company handles donations and how that compares to the shareholder suit. She also explains how other peer groups in the industry are handling the issue. In some cases, clients decide to post contributions on the website, though some companies need to first create a system to gather this information and must then decide whether to release the data or not. ‘We encourage engagement with the shareholder proposal so that a dialogue can be started and both sides can better understand each other’s concerns,’ Brauer says.
The Conference Board recommends that each company establish policies regarding political spending that include the following: (1) identification of criteria to make the business case for political expenditure; (2) training programs to educate employees on corporate policy regarding political activity; (3) a formal policy for approving political expenditures in which senior management can influence the largest and most politically sensitive decisions; and (4) a whistleblowing process for use if the established policy is breached.
Microsoft has a policy of total transparency about its political contributions, including donations to political action committees. Its policy states, ‘Political spending by Microsoft will reflect the company’s interests, further its public policy agenda and not be given in return for an official act.’ On its website, shareholders and the public can track Microsoft’s 2010 political donations to politicians, associations and political action committees, including nearly 100 donations of $250-$3,000 to a score of candidates from both parties. Its largest donation was $529,000 to the Business Software Alliance, followed by $132,000 to the US Chamber of Commerce, $95,000 to the Information Technology Industry Council and $33,000 to the Emergency Committee for American Trade.
Microsoft’s political contributions demonstrate how corporations can play politics straight down the fairway. For example, Microsoft donated $100,000 each to the Democratic Governors Association and Republican Governors Association and $11,000 to the US Conference of Mayors, and donated to the campaigns of Democrat Andrew Cuomo and Republican Susana Martinez.
Bross says that since Microsoft started divulging corporate contributions in 2007, it hasn’t encountered any objections or flak. ‘By not being transparent and open, we’d be increasing the risk to the corporation,’ he states. Microsoft has given money to legislators on telecom and judiciary committees that affect its business interests, and while the global finance crisis has triggered a great deal of mistrust in many companies, Bross considers coming clean about political contributions one way to alleviate the skepticism.
But Krumholz asks, ‘If Microsoft has access to both sides, who has access to fight Microsoft?’ What if Microsoft’s legislative agenda isn’t in the best interests of the country, privacy or competition? Can Microsoft’s smaller and emerging competitors fight its access to both parties?
Do the right thing
Charles Grezlak, vice president of state government affairs for Merck, recalls that his company was prompted to disclose its political contributions by a shareholder resolution in 2004. ‘As a highly regulated company, we need to play an active role in supporting legislators who share our values regarding important innovations in the pharmaceutical sector, including patient access to products,’ he says.
Publicizing contributions has established a sense of discipline at Merck – ‘That way, you know contributions are out there for everyone to see,’ Grezlak explains. Despite the rising interest in the next presidential election, Grezlak says the Citizens United decision will have no impact on Merck’s donations at a federal level.
Prior to Citizens United, most political donations of even $1 million weren’t disclosed in financial statements, discussed at boards or subjected to shareholder scrutiny, notes Rajesh Aggarwal, a professor of corporate finance at the University of Minnesota’s Carlson School of Management. In a study he co-authored on the effects of companies’ political donations, he concludes that most contributions don’t raise shareholder value. Most corporate donations ‘follow the preferences of the CEO and top managers rather than doing what’s best for shareholders’, he says.
Moreover, the entire issue of disclosing contributions is disingenuous for most companies since the Federal Election Board and SEC are releasing this data online. Investors can access this information ‘with not many clicks of the mouse’, Aggarwal notes. ‘In this day and age, given the ready accessibility of information, there’s little reason not to disclose it.’
Aggarwal advises most boards to limit political contributions and stick with lobbying efforts. If the donations aren’t balanced, it can have an adverse effect on the company’s ability to acquire customers and retain employees. However, the companies that give contributions to both parties may be ‘buying political insurance and hoping that both sides view them favorably and give them access.’
Brauer expects that in the wake of Citizens United, the stakes will be raised for political contributions in the 2012 presidential election. She expects more money to be spent, and the contentiousness and lack of bipartisanship to ramp up.
Whether it’s trying to buy political influence or not, Gallimore insists political contributions can affect a company’s bottom line. ‘The issue goes to the value of the brand, which companies spend significant funds to establish and maintain,’ he says. When a company’s political contributions are in opposition to its core values, its brand can be tarnished.
John Seethoff weighs in on political disclosures
In a recent phone interview, Corporate Secretary editor Matthew Scott chatted with John Seethoff, chairman of the Society of Corporate Secretaries and Governance Professionals and vice president, deputy general counsel and assistant secretary of Microsoft, about the corporate secretary’s role in corporate decisions on political contribution disclosures.
How does the corporate secretary’s office contribute to decisions on political contributions?
The issues and policy experts who touch on this from across the company would present their recommendations, and then as part of our standard review and approval process for corporate policy, generally, the corporate secretary’s office would weigh in and to some extent coordinate the final decision-making about what the policy would be.
In my mind this process reflects the central role the corporate secretary plays these days on a variety of fronts that can include policy-making in an area like this, where shareholders have a growing and important voice about what companies might do. It’s a great opportunity to bring that perspective to bear on the discussion.
Are there any key considerations that might play into decisions on political contributions for next year?
Our governance and nominating committee has responsibility for oversight of public policy and corporate social responsibility, and in that capacity it is briefed several times a year about our political contribution policies and practices. However, the board and the committee are not involved in discussions about individual contributions that are made – that’s the responsibility of management.
We report to the committee on how we are going about improving and implementing our policies and practices.
If there were a shareholder action in objection to a political contribution, what steps would be taken at that point?
As far as I know we’ve never had a complaint about a political contribution in the way you’ve described it, but there have been times when people have disagreed with positions we’ve taken on particular topics. We respond to shareholder concerns in this area in the same way that we try to do in other areas. Our corporate secretary office, our investor relations team and the staff of our senior executive leaders try hard to respond to any legitimate concern that gets raised by a shareholder. That can range from a written response in a letter explaining our point of view to an extended dialogue about what we do as a company and whether there may be a better way to go about it.
What is the main benefit of handling this issue in such a transparent way as you do, by listing contributions on your website?
Transparency is an important corporate value of ours, and this is a way of reflecting that value. It’s an area where we are comfortable with what we do. We are happy to be open about it.
Do you have any advice for corporate secretaries to help them handle this issue next year, which will include a presidential election?
It’s an opportunity for corporate secretaries to add value within their company by making sure that political contribution disclosures have been highlighted as an emerging area of concern and helping to bring together the appropriate participants in that discussion so they can reach a consensus on how the company should respond. Corporate secretaries should recognize that this is something that’s coming and that the company will be well served by having an answer when the question gets asked.
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