Corporate Political Spending: Investors Demand Transparency

By Kristin Casler, featuring Susan Frank Divers of LRN Corporation.

In an age when you are expected to put every detail of your life online for the world to see, it should be no surprise that corporate shareholders demand social media–like access into how a company spends its money, particularly to whom it makes political contributions. Add a hotly contested presidential campaign to the mix, and there is ever more clamor for details. Is your organization prepared for transparency and the accountability that goes with it?

“We live an age of accountability, transparency and values,” said Susan Frank Divers of LRN Corporation, which advises global companies on ethics and leadership. “People should feel comfortable being transparent because that’s the world we live in. Society and our culture, rather than regulators, per se, have set that expectation.”

Shareholders beating the drum

The integration of technology into our lives has empowered people to challenge corporations. In the case of shareholders, their goal is not necessarily to prevent corporate political donations. It is to understand organizations’ values, Divers said, and to allow investors to align with companies whose values they share and respect. They want to make sure companies are headed in the right direction and are trustworthy.

“More and more, people don’t want to own stock in a company that doesn’t have good ethics,” Divers said. “Even if it’s profitable, shareholders increasingly recognize that a company that does not embrace ethical behavior has an unsustainable business model. LRN’s research bears this out. The recent meltdown at Valeant^® Pharmaceuticals is a good case in point. Valeant’s stock has lost 90 percent of its value since August after questions surfaced about predatory pricing and inaccurate accounting.”

And, even when disclosure is not required, companies are responding. Transparency is becoming more mainstream, with companies such as Becton, Dickinson and Co.; CSX Corp.; and Noble Energy Inc. topping the 2015 CPA-Zicklin Index of Political Disclosure and Accountability, created by the Center for Political Accountability and the Zicklin Center for Business Ethics Research.

Some of the transparency has resulted from proxy votes. The trend may continue for 2016, as 99 proxy resolutions related to lobbying and political spending are pending, according to “Proxy Preview 2016,” a report released by As You Sow^®, the Sustainable Investments Institute Si2, and Proxy Impact.

But even in cases where the proxy vote failed in 2015, companies were inspired to have a dialogue with shareholders about what they seek and why.

According to the CPA-Zicklin report, more companies than ever are disclosing their political-giving activities. Companies at the top of the ranking say they are doing so to show their commitment to high ethical standards and good governance.

“These companies are bringing sunlight to political spending at a time when political transparency in America has become devalued,” according to the CPA-Zicklin report. “With blockbuster spending, both disclosed and anonymous, expected in the current election cycle, many of the nation’s leading public companies are laying the foundation for a new route to disclosure.”

Even companies that have not embraced full transparency have placed greater restrictions on corporate political spending. About 25 percent of companies in the index, which now includes all Fortune 500^® companies, have such restrictions.

Organization-wide buy-in

This increasing trend means more work for in-house compliance departments, boards of directors and risk-management personnel who must work together to ensure their corporate policies are conveyed and upheld. They also must have a system for disclosing their political giving and be able to respond to negative reactions that might arise from legal but otherwise controversial financing.

“In this age of hyper-transparency, people are very focused on the values of an organization and whether its management is really living them and being true to them,” Divers said. “The old rule in a company was, ‘don’t do anything you don’t want to see on the front page of the New York Times^®’ and now it’s ‘don’t do anything that you don’t want to see tweeted to 500,000 people in 5 seconds and another million tomorrow.’ This is a 21st-century reality. If actions don’t match words, an organization will suffer not only in terms of reputation but also in terms of business. This fact is played out repeatedly in the media, in the marketplace and in communities all around the world.”

Wearing a transparent cloak

So just what steps should an organization consider?

• Define your values and make sure they are reflected in all areas of activity, including political contributions.
• Be transparent; don’t wait to be forced to disclose or suffer an embarrassing data breach.
• Have a dialogue with the board, shareholders and other stakeholders about your values and consider their input.
• When possible, come to an agreement about the underlying values and be willing to discuss how they reflect in practice.
• Establish and enforce policies regarding contributions.
• Above all, be an ethical, value-driven company that can withstand public scrutiny.

“Leverage transparency to your advantage,” suggested the “HOW Report,” produced by LRN. “Focus your energies more on earning your reputation than on managing your reputation. Welcome the attention that comes with transparency as a way to differentiate yourself in the marketplace. The key is to stay authentic. Go beyond mere marketing campaigns. Actively align your values and behaviors with your purpose and business strategy. Once you do, your business will not only be differentiated in a highly competitive world, it will be sustainable.”