August 4, 2020

Scrutiny Intensifies on Political Spending

Following the killing of George Floyd, attention has increased on diversity and inclusion, among other matters. Earlier this summer, Liz blogged on our “Proxy Season” Blog that company “anti-racism” statements could lead to more scrutiny of corporate political spending. 

Now, with increased focus on “E&S” as a backdrop, this “Conflicted Consequences“ report from the Center for Political Accountability finds that corporate political spending through non-profit, tax-exempt “527” organizations often doesn’t align with company statements in support of environmental & social issues. The report examines corporate political spending over the last decade and how those funds were used to fund political efforts that have turned out to be contradictory to company public statements. CPA made a bit of a splash with this report, as it received coverage in the NYT and Financial Times the same day of the report’s release.  Here’s an excerpt from the Foreword, explaining the concern with “527” political spending:

The intermediate organizations that these companies finance often direct that money in ways that belie companies’ stated commitments to environmental sustainability, racial justice, and the dignity and safety of workers. To take just one of the many instances this report recounts, large donations channeled through these organizations helped North Carolina Republicans take control of the state legislature in 2010. They used that control to institute extreme gerrymanders of both the state legislature and the state’s delegation to Congress, and to pursue a range of divisive and anti-democratic policies, including restrictions on LGBTQ rights and new rules designed to impede the access of black voters to the polls.

Both the NYT and FT cite specific examples of apparent disconnects between company support for issues and ultimate beneficiaries of company “527” donations.  Cydney Posner’s blog discusses the report and cites a 2018 CPA report with guidance for companies to address heightened risk of potentially conflicting messages.  Among other suggestions, it suggests companies conduct due diligence of risks associated with any donation, including how the funds will be used and with whom the company is being associated by virtue of the donation. If this heightened scrutiny continues as we move into election season and beyond, it could be a big deal for companies, especially in light of the increased focus lately on corporate purpose.

What to do About “Social” Risk

Besides conducting due diligence on risks associated with donations, boards delegate various oversight responsibilities among its committees and social risk is a responsibility likely shared among all committees and the full board.  Social risk can be more difficult to get your arms around as it’s not entirely clear when or where an event might arise nor exactly how it will be triggered but it’s one risk that can invite scrutiny from customers, employees, regulators and the general public.  A recent article from researchers at Stanford’s Corporate Governance Research Initiative examined social risk, noting that the primary cause of damage is reputational, such as risk from unwanted scrutiny of corporate political spending.

The article provides the following recommendations to help boards prepare for, manage and mitigate social risk:

– Use knowledge of the past to inform future plans: examine social risk events that have impacted peer groups and related industries and evaluate patterns about how risk events have evolved over time

– Conduct scenario planning to identify the highest likelihood risk events: based this analysis on events most likely to manifest given the company’s industry, profile and vulnerabilities and quantify the potential impact by looking at brand, product, suppliers, employees and overall reputation

– Prepare responses and identify the resources necessary to prevent or mitigate the highest likelihood risks: consider both preventative and responsive measures over both short-term and long-term time horizons and develop resources, programs and policies to protect the company going forward

July-August Issue of “The Corporate Counsel”

The July-August issue of “The Corporate Counsel” print newsletter was just posted – and also sent to the printer (try a no-risk trial). The topics include:

– In Memoriam: Marty Dunn

– What’s in a Name? The SEC Amends “Accelerated Filer” and “Large Accelerated Filer” Definitions

– The Curious Case of Public Companies and the PPP

– COVID-19 Disclosure: What Does the SEC Want to See in Your MD&A?

– Covid-19: Chief Accountant’s Statement Emphasizes Financial Reporting Process

– “Going Concern” Rears Its Ugly Head

– SEC Amends Proxy Rules to Address Voting Advice by Proxy Advisors

– Lynn Jokela