Protecting Companies from Political Spending Peril

No publicly traded company would consider a request for a sizable donation from a newly formed charity without exercising rigorous due diligence on how its money will be spent. Doing otherwise would risk its reputation and violate the managers’ fiduciary duties to the company shareholders. Good business practice requires no less of a company when it engages in political spending. Indeed, when it comes to political spending, the risks may even be greater because of the myriad of laws, federal and state, that regulate political spending and reputational challenges posed by greater media scrutiny.

This election season has seen the emergence of new political players, shadowy advocacy organizations, newly minted traded associations and Super PACs dedicated to the election of a single candidate. Some of these organizations promise that their donors will never be disclosed. Others confidently assure their donors that they operating in full compliance with all applicable laws. What is often missing from their requests is basic information about the organization’s internal governance, its actual pre- and post-election plans and any financial or reporting commitments to the donors.

Companies need to protect themselves by being as thorough in knowing where their political money is given and how it is used as they are with their charitable contributions. This can be easily achieved through a strong due diligence effort. Here are examples of problems companies could avoid:

• The FBI is investigating Arizona Public Service, the state’s leading public utility, for alleged “dark money” political contributions to independent political groups to influence state regulators on a utility rate increase sought by the company.
• A campaign finance lawyer intimately involved with the creation and operation of Super PACs warned recently about their misuse. Writing in Politico, Paul Jossey cited his experience with “PACs [that] used … money first to enrich themselves and their vendors and then deployed most of the rest to search for more ‘prospects.’”
• NextEra, a Florida-based utility, faced sharp questions last year about the motivation behind its $1 million contribution to Jeb Bush’s presidential Super PAC. The former Florida governor had earlier publicly endorsed a rate hike requested by the company.
• The Institute for Southern Studies this spring highlighted the conflict some companies faced over Mississippi’s enactment of an anti-LGBT law. Many well-known companies that declare strong anti-discrimination policies also have contributed over the past decade through various political committees to legislators and the governor who supported the law.

These examples underline the reputational, business and legal risks from political spending. A key step for avoiding them is for directors to adopt policies, practices and reporting requirements for their company for political money.

The CPA-Zicklin Index, the Center for Political Accountability’s annual benchmarking of corporate political disclosure and accountability policies and practices, has found a steadily growing number of S&P 500 companies that recognize political spending as a risk and are acting to manage it.

However, there is much more companies can and should do on this front. Prior to donating to a politically active “social welfare” organization, trade association or political committee including a Super PAC, a company should do its due diligence and confirm the following about the recipient organization:

• It is governed by a board that consists of at least three members and preferably five, of which a majority are independent.
• It has an annual financial review or audit done by an independent accountant confirming that its spending complies with its bylaws, representations to donors and relevant tax laws.
• Its board receives legal advice from an attorney versed in applicable campaign finance law and major expenditures are reviewed by counsel for compliance.
• Its documents provide how residual funds will be disbursed consistent with the purposes of the organization set forth in its tax and organizational documents.
• It provides regular reports to its major donors on its spending including the candidates opposed and supported.

The level of review by a contributing company and its directors should be not less than what they would undertake when contributing to a charitable organization.

Today, companies and their directors confront threats from political money similar to those faced a half century ago during the Watergate scandal. Then, 12 corporations and 17 corporate executives were indicted or pleaded guilty, mainly to charges of making illegal campaign contributions. Companies can avoid a replay through strong due diligence and oversight of and policies for the use of their direct and indirect political spending.