Primer on Corporate Political Spending for Incoming Directors

Over the past year, several corporate executives have expressed a concern to the Center for Political Accountability that new members of corporate boards often lack a broad knowledge of corporate political spending and what it entails. They saw this as impairing new directors’ ability to set political spending policies and conduct the due diligence required to protect their company, especially in today’s risk fraught political environment.

They asked that CPA fill the gap. Our recently released Primer on Corporate Political Spending for Incoming Directors does so. As has been the case with the Center’s previous works — the Guide to Corporate Political Spending and the Guide to Becoming a Model Code Company, the Primer reflects the input of corporate executives and directors to ensure that it is a practical guide for discharging a director’s responsibility for overseeing the company’s political engagement.

The Primer opens by laying out the types of risk political spending poses to companies. The focus is on election-related spending using corporate or treasury funds. This is important for distinguishing the types of political spending in which companies can engage. Corporate political spending via company PACs receives a great deal of attention. However, as the Primer explains, corporate PAC spending is distinct from corporate treasury spending, as are the risks associated with each type of spending.

Corporate PAC money is contributed by company employees and shareholders. The contributions to the PAC are limited, as are contributions made by the PAC to candidates for election. These contributions are reported to the Federal Election Commission and are easy to trace.  While PAC contributions can be embarrassing for a company when they are made to candidates or officeholders with controversial positions, because these contributions are limited to a few thousand dollars, they do not financially tie a company as closely to the consequences in the way that treasury spending may.

Election-related contributions from the corporate treasury, on the other hand, can be unlimited when made to some political actors. In the case of third-party political groups, major companies routinely give contributions each election season in the six and seven figure range — hundreds of thousands if not millions of dollars. These funds come directly from corporate treasuries.

Third-party political groups serve as middlemen; they accept large contributions from corporations and pass that money along to other political groups and candidates. These ultimate beneficiaries pose the most serious risk for companies. This is where the impact of the company’s money occurs and the risk follows. A problem is that companies may not be paying attention to where their money ultimately ends up and what it associates them with or enables.

Some of the contributions are disclosed and easy to trace – to Super PACs in particular — but other contributions are more difficult or impossible to track. These include contributions to the governors associations, state legislative campaign committees and attorneys general associations, groups known as 527 committees after the section of the Internal Revenue Code that governs them. Contributions to these groups are reported by the recipients, not the donors. Additionally, payments to trade associations used for election-related spending and contributions to 501(c)(4) groups, also known as “social welfare organizations” or ‘non-profits,” are not disclosed and can be unlimited.  Prominent officeholders and candidates are creating social welfare organizations for the very purpose of soliciting and accepting this “dark money.”

The use of treasury funds has the greatest electoral impact and poses the greatest risk to companies. Understanding this is important for directors in pursuing robust due diligence and fulfilling their fiduciary duties.

The Primer sets all of this out along with the risks companies face – legal, internal, reputational and financial. It also provides directors with helpful guides to reviewing and setting policy on political spending for their company.  The Primer offers a framework for companies for approaching, governing and assessing their political spending. The framework is the CPA-Zicklin Model Code of Conduct for Corporate Political Spending. Importantly, following the Code gives companies greater control over political spending and a justification for saying “no.”

CPA’s foundational reports on the risks posed by spending are included in the Primer. The reports examine the nature and levels of the risks companies internally and externally assume when expending shareholder money to advance a candidate or political cause. These include spending that:

• conflicts with company core values, policies, and positions;
• is made through third-party groups;
• undermines a company’s best interests and the environment a company needs to operate, grow and compete successfully; and
• poses a threat to democracy and the rule of law.

The Primer on Corporate Political Spending for Incoming Corporate Directors is an essential educational tool for new directors to carry out their responsibilities in today’s high risk political environment.