The best democracy that money can buyMarch 2012
The trust between US consumers, investors and corporations has suffered ever since companies were allowed to spend on election campaigns without cap, regulation or disclosure. But, reports Robert Kropp, the issue shows no signs of going away
Concerns over the influence of corporations and powerful industry trade associations on politics in the United States are nothing new. “Although attempts to regulate campaign finance by legislation date back to 1867,” Wikipedia tells us, “the first successful attempts nationally to regulate and enforce campaign finance originated in the 1970s,” with passage of the Federal Election Campaign Act (FECA).
More recently, the Center for Political Accountability (CPA), a non-profit organisation, has teamed up with institutional investors and other stakeholders since 2003 in a campaign to pressure corporations to voluntarily disclose their political spending activities.
The CPA and its allies launched their effort in the aftermath of high-profile collapses of five corporations – Enron, Global Crossing, WorldCom, Qwest and Westar Energy – all of which, according to the CPA, “made political contributions a key part of their business strategies”. At that time, corporate disclosure of political spending was virtually non-existent. Today, more than half the S&P 100-listed companies disclose their expenditures, and a significant number disclose payments to powerful trade associations like the US Chamber of Commerce.
Back then, legislation such as the McCain-Feingold Act existed to limit corporate spending on elections. As of January 2010, such limits are no more. In a decision so controversial that Justice John Paul Stevens described it in a dissenting opinion as “a rejection of the common sense of the American people”, the US Supreme Court’s ruling in the Citizens United case prevented the government from regulating corporate election campaign expenditure.
The impact of Citizens United, a conservative non-profit organisation, on the electoral process was immediate. During the mid-term elections of 2010, four times as much corporate money flowed into the electoral process as did in 2006, much of it through trade associations and outside groups whose donors remain anonymous in increasing numbers. The Chamber alone earmarked $75m for the campaign, primarily to defeat candidates supportive of healthcare reform and climate change legislation.
The reputational backlash was swift, as both Target and Best Buy faced consumer boycotts in 2010 over contributions to a candidate whose opposition to gay rights appeared to put them at odds with their own workplace policies.
Even before Citizens United, the Chamber suffered a few high-profile defections. In 2009, Nike resigned from its board of directors, stating that it “fundamentally disagrees with the US Chamber of Commerce on the issue of climate change”. One week later, Apple quit the Chamber entirely. The company’s Vice President of Worldwide Government Affairs wrote: “We strongly object to the Chamber’s recent comments opposing the EPA’s efforts to limit greenhouse gases.”
Yet, for the most part, even apparently progressive companies are staying put, arguing that while they disagree with the Chamber on some issues, on others they are sufficiently aligned. The misalignment of the Chamber’s attacks on healthcare reform and climate change with the stated positions of many of its dues-paying members appears to raise questions about those members’ commitment to CSR.
As investors and other stakeholders focus more on corporate political spending – during the 2011 proxy season, shareholder resolutions addressing political spending and disclosure were included on the ballots of 32 companies, and support for 22 of them exceeded 30% – their field of concerns has widened. A report published by the IRRC Institute (IRRCi) and the Sustainable Investments Institute (Si2) revealed that in 2010, $1.1bn from the corporate treasuries of S&P 500 companies was spent on efforts to influence the political process.
Most of the funds – $979m, or 87% – went to lobbying. Eighty per cent of S&P 500 companies engage in lobbying, the report found, while only 13 “provide easily accessible information for their investors and other interested parties on how much they spend”. Two-thirds of the companies do not mention lobbying at all in their disclosures.
Furthermore, as Bruce Freed and Karl Sandstrom of the CPA point out in an article published in the Conference Board Review, an insufficient regulatory apparatus has implications for companies, investors and the global economy. “A 2009 IMF study shows how mortgage lenders spent millions in political donations, campaign contributions and lobbying activities to defeat legislation aimed at predatory lending,” Freed and Sandstrom wrote. “Their success in quashing a regulatory response that could have mitigated reckless lending practices and the consequent rise in foreclosures led the study’s authors to conclude that the financial industry’s political influence poses a risk to itself as well as to the economy.”
Why do investors care so much about corporate political spending? For one thing, the reputational risks to popular brands were demonstrated by the consumer boycotts of Target and Best Buy. And in a survey of shareholders as early as 2006, 85% of respondents agreed that “lack of transparency and oversight in corporate political activity encourages behaviour that puts corporations at legal risk and endangers corporate reputations”.
For another, several academic studies have suggested that “companies that are politically inactive tend to have higher price/book valuations than companies that are politically active”, according to a recent study co-authored by John Coates of Harvard Law School. The study adds to the existing literature that suggests that since Citizens United, companies that disclose their political spending have higher price/book valuations than those that do not.
So what is to be done? A variety of stakeholder efforts have been attempted or are underway but, thus far, no legislative or regulatory actions have succeeded. The CPA and its allies have helped persuade 90 major corporations to disclose their political spending, but systemic change has yet to be realised.
Legislation seeking to address corporate political spending, such as the Democracy is Strengthened by Casting Light on Spending in Elections (Disclose) Act – the purpose of which was described by the Chamber as “irretrievably to upend First Amendment protections of political speech” – have gone nowhere in a Republican-dominated House of Representatives. And the Shareholder Protection Act, which would require shareholder approval for political expenditures, has been proposed in the Senate for the past three years without success.
Meanwhile, grassroots support for a constitutional amendment overturning Citizens United is growing and Senate Democrats introduced a constitutional amendment in November that, if passed by three-quarters of states within seven years, would give Congress the power to regulate political spending by corporations and other entities.
But the hurdles for passage of a constitutional amendment are high, and the source of systemic change is likely to come in the form of regulatory action by the Securities & Exchange Commission (SEC). Last year, a group of influential academics petitioned the SEC to require public companies to disclose their political spending policies.
A number of institutional investor organisations, including the Council of Institutional Investors (CII) and the International Corporate Governance Network (ICGN), followed with expressions of support for the petition.
Although systemic change would ease the efforts of shareholder activists and other advocates of good corporate governance, they are not waiting for it to happen. In October, the CPA wrote to 423 corporations that do not disclose their political contributions, to pointedly request that they “adopt political spending disclosure and accountability ahead of the 2012 proxy season”. Also in October, the CPA and the Zicklin Center for Business Ethics Research published the Index of Corporate Political Disclosure & Accountability, the first ranking of companies in the S&P 100 according to their disclosure and board oversight of political spending.
The 2012 Proxy Resolutions & Voting Guide of the Interfaith Center on Corporate Responsibility (ICCR) reveals that members of the faith-based investor organisation have filed 49 shareholder resolutions for the 2012 proxy season that address political expenditures and lobbying.
An investor coalition organised by the AFSCME Employees Pension Plan and Walden Asset Management has filed resolutions with 40 companies – including Bank of America, Goldman Sachs and JPMorgan Chase – requesting disclosure of: policies and procedures governing lobbying, including that performed on the company’s behalf by trade associations; payments used for direct lobbying and grassroots lobbying communications; membership of and payments to any tax-exempt organisation that writes and endorses model legislation; and decision-making processes and oversight by management and directors.
Trillium Asset Management and Green Century Capital Management filed resolutions with Bank of America, 3M and Target, requesting that they refrain from making political donations altogether. And two government watchdog groups – Common Cause and the US Public Interest Research Group – announced that they have sent letters to more than 700 businesses, including all the companies in the S&P 500, asking them to sign a pledge to refrain from political spending. The groups also asked the companies to specify that trade associations such as the Chamber not use their dues for political purposes.
Will any of these efforts succeed in reducing the influence of corporations on the US electoral process in time for November’s Presidential elections? It’s unlikely, but investors and other stakeholders are also unlikely to ease up on their efforts to get companies to disclose. And corporations’ boards and managers themselves might want to revisit their CSR reports and consider the effect on reputation and the bottom line before pouring millions of dollars from their treasuries into politics.
Robert Kropp is a freelance journalist writing on sustainability and CSR
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