The case for board oversight of corporate political spending

May 04, 2015
<p><span class="rpHighlightAllClass rpHighlightSubjectClass"></span>With risk and reputation on the line, companies need thorough process to vet recipients of and reasons for political gifts</p>

There is growing recognition by companies that disclosure and accountability are part of risk management – and given the potential dangers posed by political spending, it’s a risk that needs to be managed.

That’s the view of Bruce Freed, head of the Washington-based Center for Political Accountability, which has partnered with various investors this proxy season to file resolutions seeking disclosure on political contributions, as well as corporate policies for and board oversight of such spending at roughly 50 companies.

This year, the CPA-Zicklin Index, which benchmarks companies according to their political disclosure and accountability policies, is expanding from the largest 300 to all 500 companies in the S&P Index. That’s significant, Freed says, because these are ‘the predominant political spenders and they’re the major figures in the trade associations’, with the wherewithal to contribute to the 501(c)4 organizations.

At 164, or 55 percent, of the 300 largest companies, boards exert some sort of oversight over political spending, and that number has been growing in recent years, says Freed. The latest Public Company Governance Survey by the National Association of Corporate Directors, however, shows lower numbers. Nearly 29 percent of respondents say they don’t receive reports about their company’s political spending, 7.5 percent receive sporadic reports, just under 7 percent get regular reports, and 5.5 percent receive reports only when the board inquires.

But having an appropriate corporate governance process for vetting political contributions and the company’s policies around them shouldn’t necessarily mean board oversight, says Ronald Jacobs, co-chair of Venable’s political law practice in Washington. There may be more relevant expertise in this area on the company’s government affairs or legal teams than on the board.

‘As long as you have internal systems, I think you have a much better ability to vet contributions and decide who you’re going to support than board members who have a lot of other important things to worry about and who aren’t involved in the government affairs practice on a day-to-day basis,’ Jacobs says. With regard to the CPA-Zicklin Index, companies generally can earn governance points by having management ‘provide a report to the board of what you’ve done as opposed to requiring the board to sign off on things. That way you check the box and get the points without really changing where the control lies,’ he adds.

What’s essential is that no one person be in charge of corporate contributions to trade associations, political candidates or interest groups, he notes. Ideally, a combination of members from the government affairs, external affairs and legal teams will scrutinize the groups receiving money and the business case for giving to them, as well as any potential conflicts of interest. That ensures the recipients aren’t pet projects of any one person.

‘It’s like a lot of internal controls – you don’t vest one person with the authority to spend money out of an account that no one monitors,’ Jacobs says. ‘But you’ve got good internal transparency and different points of oversight into the process.’

For Tim Smith, director of ESG shareholder engagement at Walden Asset Management, it’s not a question of whether the board is more qualified or knowledgeable than certain teams within management. What’s critical is that there be a ‘thorough review that goes all the way to the top,’ he says. ‘It’s that the process is a thorough one that doesn’t just deputize the issue to government affairs and say that anything you do flies.’

It comes back to the fact that with any such decisions ‘there is risk and reputation involved and the board should have a hand in reviewing it. And sometimes top management would like to share that responsibility with a board committee that’s going to give advice, counsel and finally sign off on it,’ Smith says.

Few board committees he’s aware of are micro-managing political spending. ‘Usually it’s more of a top-level review rather than a nuts-and-bolts one,' he says. 'So I think it’s a totally appropriate and responsible way for the board to be assigned to do this.'

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