Senior executives of U.S. public companies have enormous discretion to make political contributions with shareowner funds. While corporations are not allowed to donate money directly to political candidates, they are free to dip into corporate coffers to pay for advertisements for or against candidates, initiatives and other independent political campaigns. Most such giving goes unreported. Disclosure is scattered among several federal authorities or nonexistent: Companies are not required to disclose what they give to independent political organizations that are exempt from naming donors or their payments to trade associations that are used for political purposes. A 2011 study found that more than half of companies in the S&P 100 Index disclose their direct political spending and have board oversight of--or bar entirely--spending corporate cash on politics. Still, many public companies keep their political activities behind a curtain.
Experts estimate that hundreds of millions of corporate dollars flow into the political process every year. That river of corporate political giving is reported to have turned into a flood in the wake of a U.S. Supreme Court decision on Jan. 21, 2010. In its landmark ruling in Citizens United v. Federal Election Commission, the Supreme Court said that the government may not bar companies, labor unions or other organizations from using their general treasuries to fund ads that support or oppose political candidates.
The danger for shareowners is that the money could be used to underwrite candidates, issues and activities that are contrary to the values and policies of the company. That could tarnish the company’s reputation and, ultimately, its share value. A 2007 study by three professors at the University of Minnesota Carlson School of Management found that companies that made large political donations tended to have lower share values.
Council policy calls on boards to monitor, assess and approve all charitable and political contributions (including trade association contributions) made by their companies. It also calls for boards to develop and disclose publicly guidelines for approving charitable and political contributions. In addition, the Council urges board to disclose on an annual basis the amounts and recipients of all monetary and non-monetary contributions made by the company during the prior fiscal year. The report should include expenditures earmarked for political or charitable activities that were provided to or through a third-party. Beyond disclosure, the most effective way to ensure that corporate political contributions serve investors' best interests is through investor oversight of boards. Two critical avenues for effective oversight are majority voting for directors in uncontested elections and proxy access, a path for shareowners to nominate their own board candidates if they are dissatisfied with current directors.
Investor support for disclosure and oversight of corporate political spending is significant. In 2011 shareowners filed 78 proposals asking companies to report on their political spending, up from 48 during the first half of 2010, according to Institutional Shareholder Services (ISS). A proposal submitted by the New York City pension funds at Sprint Nextel garnered 53 percent of the votes cast at the company’s May 10 annual meeting. Overall, support for such proposals averaged 31 percent of the votes cast for 39 proposals that came to a vote as of June 2. Support averaged just 9 percent six years ago.
On Aug. 3, 2011, a group of distinguished law professors submitted a petition to the Securities and Exchange Commission (SEC) asking the agency to approve rules requiring U.S. public companies to disclose their spending on political activities. The Council filed a comment letter (see below) supporting the thrust of the petition.
