The January 6th Capitol riot thrust corporate America into unchartered waters, leading many companies and their employee PACs for the first time to broadly suspend their contributions to federal lawmakers. Companies are now facing the predicament of how to respond to voting legislation at the state level. The pressure on companies, particularly from employees, to take stands on hot-button political issues is unlikely to abate, and neither is the scrutiny of those stands. In this new landscape, companies face greater reputational, business and legal risks when engaging in political activity.
While corporate boards are generally not on the front line in making decisions about corporate political activity, they can play a key role in mitigating the risks and capitalizing on the opportunities in this arena. Here are six key questions for directors to ask:
1. What is the scope of our current political activity?
Companies have a broad political activity toolkit. Among other actions, they can take a public stand on an issue; lobby directly and through third-party organizations; make contributions to political campaigns and third-party organizations from the company or its employee-funded PAC; support ballot initiatives; and support political engagement by their employees, such as through get-out-the-vote efforts.
Asking management for an inventory of its activities may help lead some companies to consider whether to simplify the scope of their efforts. The greater the complexity, the more difficulty companies may face in managing reputational and other risks. The issue for companies used to be whether they could contribute; as restrictions on corporate political giving have been lifted, the question for companies these days is more about whether they should.
2. What is our strategy?
Boards should ask management what the goals are of the company’s political activity strategy, the cost-benefit analysis of each component, and how they align with the organization’s values. The latter is especially challenging: Aligning a company’s own actions with its beliefs is difficult enough. Having them in full lockstep with those of the third-party organizations or candidates they support is impossible, but companies can have some guidelines to vet organizations and candidates before making contributions, and then periodically review them thereafter.
It’s important for the discussion between the board and management on strategy to be an ongoing conversation, in which boards ask how the company’s strategy is evolving in light of business priorities and the broader environment. Indeed, the social, health and economic crises of 2020 underscored the value of companies reconsidering the scope of their lobbying activity to address social issues that may not have been on their radar screen before.
3. What kind of governance and controls do we have in place?
Boards should understand not only their company’s various political levers, but also their governance and controls in place. Who controls direct corporate contributions? What are the controls for working with third parties such as lobbyists and trade associations? Companies have often taken reputational hits for having inadequately vetted the third-party organizations to which they are donating and having poor governance processes in place to control their activities.
4. What are we doing not just to disclose, but to educate and engage?
Given the number of (and growing support for) shareholder proposals on the subject, a fair amount of board attention has already been focused on disclosure of corporate political contributions and lobbying activity. And an area for ongoing board discussion regarding disclosure is the extent to which the company should address not just its own political activity, but also contributions to trade associations—an increasingly common practice.
To help set more reasonable expectations—and reduce pressure on companies to take stands that may not align with business interests—boards should go a step further by asking management about how the company is educating and engaging other stakeholders in this area. This is especially important for employees, who are often the leading source of pressure for companies to take political stands. Boards can ask what the company has done to explain the purpose of the company’s political activity, the hard truth that the company’s political activity may not always align with employees’ interests, and that to employees that they are free to engage in their own political activity.
Boards can also ask whether management has considered bringing employees into conversations with legislators, which can both educate workers about the political process and bring authenticity to these talks with policymakers.
5. What is our protocol for responding to a crisis in this area?
Another area for boards to explore is the company’s level of preparation for a crisis. In the corporate political activity arena, crises—which distract management from its ordinary business and present significant risks—can arise from multiple angles. These include sudden pressure to take a position on an issue; a scandal arising from some person or entity to which the company provided money; or some other conflict with the company’s stated values. Without micromanaging, boards should know who takes the lead in those response efforts, who is consulted, and the process that management has in place to incorporate learnings from crises as they inevitably occur.
6. In light of all this, what role should the board play?
Boards are likely to play mostly oversight and advisory roles with respect to corporate political activity. Getting involved in day-to-day decisions, or directly engaging with stakeholders (other than, perhaps, in connection with shareholder proposals on the topic) runs the risk of distracting the board from its other responsibilities and even factionalizing the board along political and social lines.
There may be times when it’s appropriate for the board to adopt a policy or set of guidelines or principles—say, for example, regarding direct contributions to political campaigns with corporate funds. But even then, it’s important to ask management to come forward with its recommendations, given that every company has a somewhat different set of priorities when it comes to political activity.
As a result of having a discussion on these six issues, some companies may decide to bail out entirely on political activity. Others may dial it back a bit—perhaps they continue direct lobbying but suspend corporate and/or PAC giving; others may cease contributions to third-party organizations. And some might focus their efforts on taking leadership positions on certain issues that have not been part of their agenda.
No matter what direction these discussions lead, however, they should help to ensure that firms are better prepared to pursue their legitimate and appropriate political and lobbying agendas in this era of intense scrutiny and polarization. Currently, companies can find themselves as “soft targets” for those who want the private sector to advance their agendas. Now is the time for companies to take initiative, have a clear strategy, and set well-understood expectations for how they will engage with political issues in the future.
