Turning Words into Action

Bruce F. Freed is president of the Center for Political Accountability; Karl J. Sandstrom is a former Federal Election Commissioner and practices law at Perkins Coie LLP. This post is based on a CPA publication by Mr. Freed and Mr. Sandstrom. Related research from the Program on Corporate Governance includes Shining Light on Corporate Political Spending and Corporate Political Speech: Who Decides?, both by Lucian Bebchuk and Robert Jackson (discussed on the Forum here and here), and Corporate Politics, Governance, and Value Before and after Citizens United by John C. Coates.

BlackRock CEO Larry Fink’s recent annual letter to corporate leaders (discussed on the Forum here) correctly urges companies to contribute to society. At a time when the private sector is being pressed to address major societal issues, his call is especially important. There’s a glaring omission, however: A business cannot begin to evaluate its social impact and business risk if it doesn’t openly and forthrightly address its spending to influence political elections, and the consequences of that spending.

This is the case when public companies spend more money politically, whether openly or through secret or hard-to-track conduits. Corporate money could be significant in affecting the outcome of this fall’s congressional and state elections, with major consequences for the nation and for companies.

Why is it critical that institutional and widely diversified investors such as BlackRock promote transparency and accountability?

First, it’s essential to protecting the integrity of markets and the smooth functioning of the economy. These should be in the interest of all companies. When a company contributes to politicians secretly and without accountability, the hidden decisions that result can distort our economy as well as corrupt corporate decision-making. Rent seeking and securing unwarranted market advantage through government action becomes a priority. There’s also the growing problem of concentration and its wider impact. Although an individual company may benefit, the economy suffers and with it the interests of diversified investors.

These threats are exacerbated by company use of “social welfare” organizations, also known as 501(c)(4)s, and trade associations to hide their political spending. These groups, underwritten by company money, often have taken positions at odds with the financial interests of a company and with its brand.

A company that relies on the promise of secrecy may find that the promise goes unfulfilled and the company is exposed to unwanted publicity with business and reputational risks.. These might include a public boycott or backlash over a controversial political donation or one that is seriously at odds with a company’s core values. The latter has occurred recently when some companies’ political expenditures have conflicted with their positions on diversity, gender equity and climate change.

Looking beyond markets, companies face greater scrutiny in today’s sharply polarized political environment over who and what they are associated with through advertising and political spending. This trend heightens the need for companies to approach political spending in an open, accountable manner in order to protect themselves and manage the higher degree of risk.

The 2017 CPA-Zicklin Index, an annual benchmarking of political disclosure and accountability policies of the S&P 500, finds that companies in increasing numbers are disclosing and overseeing their electoral spending. As a recent law review article pointed out, political disclosure and accountability is becoming the norm for companies. This is important as they follow Mr. Fink’s advice and commit to a broader, more societal outlook.

While his call is timely, it must be expanded to include political disclosure and accountability. This key step would help companies ensure that their political spending actually aligns with their social purpose, as Mr. Fink contemplates. It would also be an important step in strengthening risk management. BlackRock could greatly increase the impact of its call by supporting shareholder resolutions urging companies to adopt these policies.

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