A recent report by a pro-transparency group and The Wharton School found a clear trend among S&P 500 companies toward increased disclosures and oversight regarding their political spending. Per the report, more than half of such companies now disclose some or all of their election-related activities, which was an increase of nearly 10% from last year. The report also found a positive correlation between shareholder engagement and increased disclosure, which is consistent with a broader trend of shareholder activism and corporate resolutions relating to political spending. The report is an important reminder for boards, management and in-house lawyers that, especially in the current contentious climate, corporate political activity continues to be a significant public focus and that they should proactively manage their oversight and disclosures lest investors or the media do it for them.
The CPA-Zicklin Report and 2019 Index1
The Center for Political Accountability (CPA) is a nonprofit, nonpartisan organization with the stated mission of bringing transparency and accountability to corporate political spending. For the past eight years, the CPA has partnered with the Carol and Lawrence Zicklin Center for Business Ethics Research at The Wharton School of the University of Pennsylvania to publish the CPA-Zicklin Index along with a report on the results (the “Index”).
The Index rates S&P 500 companies based on a number of criteria relating to political spending, including (i) whether the companies disclose (or prohibit) corporate political contributions, (ii) whether and to what extent they have adopted policies on political spending (and whether those policies are publicly available), and (iii) whether there is board oversight of political activity. Based on these criteria, the Index ranks companies and notes year-over-year trends, including identifying those that are “most improved” and calling out “basement dwellers” and “backsliders” that score lower than they did the previous year. This year’s Index also includes a strident forward by Chief Justice Leo E. Strine, Jr. of the Delaware Supreme Court that criticizes the “Wild West” of corporate political spending and, consistent with the mission of the CPA, calls for fundamental reform and increased transparency.
Across the board, the data show a trend toward increased attention and transparency regarding corporate political spending. Among the key metrics in this year’s Index:
- “Core” S&P 500 companies (those on the list since 2015) increased their ratings by 25%, while the overall increase by S&P 500 companies generally was 7%;
- 73 companies scored 90 percent or higher (up 28% from last year);
- 251 companies disclose some or all of their election-related spending (up 8% from last year);
- 186 companies prohibit at least one category of such spending (up 6% from last year), 12 of which fully prohibit the use of corporate assets to influence elections (up 20% from last year); and
- Seven companies had scores decline by 10% or more, and 59 companies received a score of zero.
Shareholder Engagement and the Drive Toward Political Transparency
A key trend observed by the Index authors was the positive impact of shareholder engagement on a company’s Index score. Of the 16 companies receiving the highest year-over-year score increases, 12 had experienced some degree of shareholder engagement on the issue of political spending.
This is consistent with a broader movement of shareholder activism relating to corporate responsibility in general, and political disclosures in particular. While the SEC had considered implementing rules that would require public companies to disclose political spending, Congress has effectively killed the proposal with spending bills that prohibit funds from being used by the SEC to implement such rules. Shareholder activists have filled the void by proposing resolutions that require corporations to disclose contributions to political candidates, parties, lobbyists, trade groups and so-called dark money groups.
A recent article from the Harvard Law School Forum on Corporate Governance and Financial Regulation noted that in 2019, a coalition of at least 70 investors had filed proposals at 33 companies seeking disclosure reports that include federal and state lobbying payments, payments to trade associations and social welfare groups used for lobbying, and payments to tax-exempt organizations that write or endorse model legislation.2 That article further noted that investors had specifically targeted companies affiliated with a nonpartisan group that had a record of opposing climate change regulation. Even without formal resolutions, shareholders may also pressure corporations on political issues through letter-writing and other influence campaigns.
In our increasingly contentious and transparent environment, the public is more informed about and focused on the political activities of corporations. This fact is underscored by recent social media campaigns and boycotts targeting companies that support—or are perceived as supporting—certain politicians, groups or causes. Leading up to and following the 2020 election season, companies should expect continued focus on their political spending and related disclosures and oversight, and they should expect increased transparency from their peers.
In light of this trend, companies should proactively assess and plan their political activities with an eye toward public perception. This could include education of senior management on the ways in which their individual political contributions can be scrutinized by the media and public, as well as tracking of traditional political spending by the corporation and indirect contributions to trade associations, 501(c)(4)s and other advocacy organizations.
For companies that deem political spending to be appropriate and in their best interest, they should further consider at least some form of disclosure, and should also be prepared to explain the considerations behind the spending. In both cases, if companies fail to take control of the narrative regarding their own activities, shareholders, employees and the media may do it for them.
Finally, companies should evaluate policies and procedures for control over political activities and contributions, and address any gaps. As reflected in the Index and recent shareholder proposals, board committee oversight is itself a significant focus of activists and pro-transparency groups. Such policies also mitigate risks from missteps and government enforcement of complex regulations relating to lobbying, campaign finance and “pay to play” restrictions.