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Shedding Light on Political Spending

    Client Alerts
  • January 26, 2012

In recent years, shareholder activists have called for greater transparency regarding corporate political spending. Demands for full disclosure – even for shareholder approval of certain political spending – increased dramatically in the wake of the U.S. Supreme Court’s 2010 decision in Citizens United v. Federal Election Commission, which held that corporate funding of independent political advertisements in candidate elections could not be limited.

Shareholder Proposals Gaining Momentum; ISS Policy Changing

Following Citizens United, political spending by public companies has increased 400% over the level in 2006, according to a study by the Center for Responsive Politics. Shareholder proposals regarding corporate political activity likewise have increased, and we expect the trend line to continue. The proposals generally focus on requiring companies to:

  • Release reports detailing their political contributions and spending,
  • Adopt political contribution policies, including those that maintain “political neutrality,”
  • Release reports detailing their “indirect” political spending, such as contributions to trade associations, or
  • Describe their political contributions policy and annual political spending in the proxy statement and submit them to shareholders for an advisory vote.

The latter proposal is modeled after the United Kingdom’s Companies Act, which prohibits political donations or expenditures above de minimis levels without prior shareholder approval.

Prior to Citizens United, these types of shareholder proposals received single-digit support. In contrast, Institutional Shareholder Services (ISS) reports that in the 2011 proxy season, these shareholder proposals received, on average, 27 percent of the vote, and the 35 proposals from the Center for Political Accountability (CPA), a coalition of 34 organizations that includes many of the most prolific shareholder proponents, received, on average, 33 percent of the vote.

For the 2012 proxy season, CalPERS and CalSTRS adopted policies calling for public company disclosure of political spending, which should further increase support for proposals. And, ISS changed its previous policy on shareholder proposals to improve the disclosure of political contributions from a “case-by-case” approach to a “generally vote FOR” recommendation. ISS will, however, consider the following:

  • The company’s current disclosure of policies and oversight mechanisms related to its direct, political contributions and payments to trade associations or other groups that may be used for political purposes, including information on the types of organizations supported and the business rationale for supporting these organizations, and
  • Recent significant controversies, fines or litigation related to the company’s political contributions or political activities.

An Issue of Risk Management

The risks associated with political spending range from reputational to business and legal. In the past few years, several companies have experienced negative publicity for contributing to certain political campaigns and initiatives. Target Corporation, for example, faced backlash in 2010 when it donated money to a pro-business candidate with a controversial social platform. Despite Target’s progressive employment policies, the contributions led to protests, boycotts and negative publicity.

Companies that adopt robust approval and oversight policies are better positioned to avoid serious financial, legal and reputational risks associated with political spending, which protects shareholder value and promotes the company’s best interests. For instance, some CEOs exert considerable influence over political spending decisions. A risk arises when spending decisions are based on the CEO’s personal choices rather than the company’s business goals. Clear board oversight can mitigate this risk. In addition, having a deliberative decision-making process for political spending permits a company to deflect undue political pressure to contribute.

Formal Policies on Political Spending

Many public companies have adopted formal policies on political spending as a result of this recent activity. By setting out objective criteria, a company has a process for evaluating the benefits and risks of political spending, measuring whether such spending is consistent with the company’s goals, determining a rationale for such spending and judging whether such spending achieves its goals. Many companies also adopt policies restricting political spending, such as prohibiting all independent expenditures, prohibiting direct spending on political candidates or prohibiting spending on ballot measures.

Voluntary Disclosure on the Rise

An increasing number of public companies are voluntarily disclosing their political expenditures. A recent study by the CPA found that 85 companies in the S&P 100 disclose their direct political spending, and 52 disclose their full political spending, including payments to trade associations, such as the U.S. Chamber of Commerce, that are used for political activity. Disclosure helps ensure that board oversight and formal policies are meaningful and effective. It also gives shareholders the ability to judge whether corporate spending is in the company’s best interest and identifies possible sources of risk. The Securities and Exchange Commission is currently considering a petition submitted by a group of law professors asking the SEC to adopt rules that would require public companies to disclose political contributions in their annual proxy statements. While this petition is unlikely to lead to a disclosure requirement anytime soon, it is further indication of the current heightened visibility of this issue.

What You Should Do Now

Companies that currently have an enterprise risk management program should confirm that it includes a current political spending policy and monitoring mechanism. Companies without an ERM program should evaluate whether political spending is an appropriate issue for consideration by its board. All companies should consider whether voluntary disclosure is helpful, either to address current political spending or silence shareholder activists.


Additional Articles from the Winter 2012 Public Company Forum:


Playing the Government Incentives Game

Attorney-Client Privilege – A Public Company Gotcha

Angry Birds and Board Books: The Case for Electronic Board Portals

Dodd-Frank Act Progress Report: Winter 2012