Corporations Should Reconsider the Value of Their Political Action Committees

The fallout from the storming of the Capitol building on January 6, 2020 by organized groups of militant and militarized Trump supporters at the behest of the President himself has been widespread, and there has been a backlash by corporate America. Scores of major corporations were quick to restrain or press the “pause” button on their political action committee (PAC) contributions.

Ongoing Calls for Corporate Disclosure

Corporate political spending has long been an issue in corporate governance, and the objections have steadily grown louder and gained more support. Prominent corporate governance experts have been calling for regulatory action for years now, most notably 10 professors (including Director of the Harvard Law School Program on Corporate Governance, Lucian Bebchuk, and future SEC Commissioner Robert Jackson) who filed a rule-making petition to the SEC in 2011 that received over one million comment letters in support, and Bruce Freed of the Center for Political Accountability who has led the movement to persuade corporations be more transparent about their political contributions. Former Delaware Supreme Court Chief Justice Leo Strine has also contributed scholarly work to the conversation.

Shareholder proposals on this issue are receiving increasingly higher levels of support. [1] And in December, after years of indicating that it did not place much importance on corporate political contributions disclosures, BlackRock said it has started to “evaluate a company’s disclosure and other publicly available information to consider how a company’s political contributions and lobbying may impact the company,” and where it sees “material inconsistencies with [the company’s] stated public policy priorities, [BlackRock] may support a shareholder proposal requesting additional disclosure or explanation for such inconsistency.”

Corporate Reaction to January 6^th

Immediately after the hostile takeover of the Capitol, well over 50 major corporations announced that they would be suspending their corporate PAC giving, some isolated to the 147 members of Congress who voted to object to the electoral votes counted on January 6, and some from all members of Congress. At least one company requested objecting Senators to return the company’s PAC contributions.

Campaign finance experts have said that these moves are largely symbolic since the dollar amounts from corporate PACs are now dwarfed by the unlimited amounts that super PACs and über wealthy individuals make to politicians. Also, some of these corporate PAC pauses will not mean a lot since the companies have said they will be brief, and they happen to coincide with a natural down period for contributions. For the companies that have not given a timetable, the pauses likely will not be permanent. Companies will probably resume PAC contributions once legislation they need passed (or blocked) emerges or when the 2022 election cycle begin. By then, some of the public anger will have died down, and memories are short. Plus, there will not be press releases about resuming PAC contributions, so only people who closely track the disclosure will know. And there is always a time lag for the disclosure.

Trends and Considerations

This will become a bigger board issue.

Most large companies now give their boards some kind of report on corporate political spending, including contributions to trade organizations, such as the U.S. Chamber of Commerce, the National Association of Manufacturers (NAM), and the Pharmaceutical Research and Manufacturers of America (PhRMA). However, we do not know how in-depth those board reports are. They could be very high-level and just lay out how much the company gave to Republicans, Democrats, and large trade organizations in a given year without providing any analysis on strategy, flagging potential controversy with particular contributions, or providing information about contributions at the state level. These reports might be given to a committee and not the full board. Senior management should expect boards to start asking for more.

This is another sign that corporate America will not stay silent on social and political issues.

The experience of the past four years has shown that corporations and their leaders (a) are not as shy about wading into social and political issues; (b) have become more progressive on the issues; and (c) are not as solidly Republican as they used to be. That is not entirely new. Many prominent companies signed on to amicus briefs to support cases before the U.S. Supreme Court on affirmative action [2] and LGBT rights [3] well before Trump came onto the political scene. Over the past four years, corporations have gone further to publicly object to the Trump administration’s “Muslim ban,” lobby to support Deferred Action for Childhood Arrival (DACA), and make strong statements supporting the Black Lives Matter movement. Also recall how the President’s Manufacturing Council quickly disbanded after Trump’s response to the 2017 “Unite the Right” rally in Charlottesville. A large portion of corporate America has been supporting tougher climate change policies. And many CEOs themselves publicly supported Hillary Clinton in 2016. While some of this may be seen as public relations moves, even doing these kinds of things for PR purposes is a departure from the traditional corporate playbook—take no positions on social or political issues because you will undoubtedly alienate half of your customers.

Sleeper shareholder proposals can eventually become relevant.

As we have seen in many instances, a major unexpected event can create the opportunity for a draft policy that never generated much support, but continued to hang around, to suddenly become relevant. NorthStar Asset Management has been submitting proposals for companies to issue reports on what they call “congruency between political contributions and company values” for many years now, even though those proposals rarely received meaningful support. Those proposals may have legs this proxy season since they get at the essence of the corporate PAC issue companies are wrestling with. In general, political contributions disclosure proposals will receive significant swells of support, especially if BlackRock starts to vote in favor of them.

How will this impact trade associations?

Corporations fund trade associations directly in the form of membership dues. So, corporations’ taking a break on PAC contributions will not impact the budgets of trade associations for the most part. This may make trade association memberships even more important. If a company is no longer giving to politicians through its corporate PAC for access to the halls of Congress, trade associations might be their only means of getting it. That will make activists redouble their efforts to force corporate disclosure of trade association dues. Unlike corporate PAC information, which companies already publicly disclose to the Federal Elections Commission, dues and other funding that corporations give to trade association are not in the public domain. Some of the major trade organization themselves (including the U.S. Chamber of Commerce and PhRMA) have paused contributions to political candidates in the wake of the raid on the Capitol for many of the same reasons corporations did. But like with companies, it is hard to see that lasting forever.

Is It Time for Corporations to Permanently Dismantle Their Corporate PACs?

Companies discount the impact that campaigns to fund their corporate PACs has on employees. [4] To put it in clear terms, it is awkward and uncomfortable to be asked by your employer to forego some of your after-tax salary for them to give to politicians of their choosing. While employee contributions to PACs are technically voluntary, the pressure is implied, especially when participation is not anonymous. And there are obvious conflicts when the company can potentially contribute to the campaign of a politician whom the employee does not want elected. The theory is what is good for the company is good for the employee. But there may be other, less coercive ways for the company to achieve its objective than asking for paycheck deductions. For example, the company could provide an internal website for employees to learn how different politicians’ policy positions impact the company’s interests. This educational approach puts the information and choice to contribute to individual candidates in the hands of the employees and reduces the appearance of employer coercion.

The appearance of coercion is heightened when the company offers perks to those who contribute to the corporate PAC, such as matching contributions to charities and preferred parking spaces. While the law allows companies to use “special events and promotions” to entice employees to give its PAC, including:

• Golf tournaments;
• Raffles;
• Silent auctions;
• Special prizes or recognition events for contributors of a certain amount;
• Concerts; and
• Any other fundraising event or promotion using prizes or entertainment as an inducement to make a contribution to the [PAC],

doing so may create the impression that contributing to the PAC is an act to be rewarded, and those who do not contribute stand to lose something of value. Even worse, it could cause non-contributing employees to feel discrimination related to political activity.

The normalization of asking employees to help the company further its political interests can also enable more extreme and inappropriate behavior, as seen in cases where CEOs have used company resources to ask direct reports and other senior executives to give large amounts to particular presidential candidates or tied employee wages to attendance at on-site rallies for candidates.

Given the diminished importance of corporate PACs in campaign finance, companies should take this opportunity, when there is safety in numbers, to reassess the necessity of their PACs. A recent New York Times DealBook column by Andrew Ross Sorkin described how IBM has never had a corporate PAC in its 110-year history. Charles Schwab Corporation announced on January 13 that it will discontinue its corporate PAC and donate the remaining assets to the Boys & Girls Club of America and historically black colleges and universities, believing “a clear and apolitical position is in the best interest of our clients, employees, stockholders and the communities in which we operate.” Placing this decision in the context of stakeholder governance is a smart path for other companies to follow.

Endnotes

1Gibson Dunn, “Shareholder Proposal Developments During the 2020 Proxy Season” (Aug. 4, 2020).(go back)

2Grutter v. Bollinger, 539 U.S. 306 (2003); Fisher v. University of Texas at Austin, 570 U.S. 297 (2013).(go back)

3 United States v. Windsor, 570 U.S. 744 (2013).(go back)

4Ilona Babenko, “Do CEOs Affect Employee Political Choices?” Harvard Law School Forum on Corporate Governance (Aug. 28, 2016).(go back)