Is Spending Money From A Business Committee For Personal Use Illegal?
Idea in Brief
The Situation
Since Citizens United, companies take often donated to political candidates they promise will do their industry's bidding or support a specific cause.
The Problem
If firms publicly advocate a contrary stance, they risk being seen as hypocritical and incurring a backlash from shareholders, employees, or other stakeholders.
The Solution
Ideally, companies should cease making political contributions birthday. Declining that, they should commit to giving simply through a PAC that raises voluntary coin from employees and other stakeholders—or at least contribute only according to a political spending programme approved by shareholders.
On April fourteen, 2021, in response to a restrictive Republican-sponsored voting police in Georgia, the CEO of Google joined 200 other corporate CEOs in publishing an open up alphabetic character in the New York Times and the Washington Mail service stating opposition to "whatever discriminatory legislation" that would make it more than difficult for Americans to vote. But there was a catch: Google had quietly funded a "policy working grouping" on "election integrity" with the Republican State Leadership Committee, an organization that supported the Georgia legislation and similar legislation in other states. During the RSLC working group meeting that Google's state policy manager attended, slides were shown calling "election reform" "the only line of defense of the Republican Party." Months earlier, Google had also donated $35,000 to the RSLC from its corporate treasury.
Such inconsistency—what some have called hypocrisy—has become owned in the corporate world every bit a directly consequence of the U.Due south. Supreme Court'south 2010 conclusion in Citizens United 5. Federal Election Commission. That ruling freed corporations to fund political candidates and nighttime-money entrada committees (organizations that practise non have to disclose their donors).
Every bit a result, companies now donate to help elect candidates they hope volition do their industry's behest or support a specific cause, even every bit they publicly advocate for the contrary opinion. A 2020 report by the Middle for Political Accountability offers abundant examples: corporations that take publicly demanded racial equality while making contributions to groups and candidates that promote racial gerrymandering; corporations that purport to be concerned virtually climatic change while donating to groups that challenge the EPA'south make clean-power plan; and corporations that claim to protect LGBTQ rights while funding groups that helped elect supporters of the 2016 "bathroom bill," which abolished certain antidiscrimination protections for gender identity.
Deeper problems lurk across hypocrisy. Because political donations are controlled past managers, and considering no corporate stakeholders, including shareholders, base their human relationship with a company on the expectation that it will use its entrusted majuscule for political purposes, corporate political spending cannot reflect the diverse preferences and views of those stakeholders. Even the classic justification that corporate donations maximize shareholder wealth is on shaky footing: Emerging evidence suggests that they tin destroy value past suppressing innovation and distracting managers from more than-pressing tasks.
Mayhap most important, political donations profoundly heighten corporate risk. In an era when customers, employees, and investors are increasingly scrutinizing companies' records on employee, environmental, social, and governance issues (we prefer the term EESG over the more common ESG, to appropriately emphasize the importance of employees), the threat of blowback from political contributions has get too not bad for executives to ignore. In the wake of the 2021 anarchism at the U.S. Capitol, for example, public scrutiny of big corporate contributions to politicians who refused to certify the results of the 2020 presidential election led many companies to say that they would pause or even suspend political donations—some for a predefined period, others indefinitely.
Only the risks and costs imposed by political contributions cannot be rationally or effectively addressed past advertising hoc moratoriums. Instead, corporations demand to implement systematic and principled reforms to avert future gaffes and controversies, reduce their interest in time-wasting and costly political spending, and improve marshal their lobbying and donations with their stated values. In this article nosotros explain the forces driving companies to make risky, potentially hypocritical donations. We argue that these donations are likely to destroy value as business concern about such spending and demands for transparency rising. And we propose concrete activeness to enable corporate leaders to avert this trap while freeing up attention and resources to focus on running their companies well.
The Legitimacy Problem
Earlier Citizens United, the law reflected a full general societal consensus that keeping corporate coin out of elections was a good matter. Directly contributions to candidates and contained expenditures (such as advert) to promote the election or defeat of candidates were prohibited. Companies that wished to participate in political action could do and so through a corporate political action committee (PAC) funded by voluntary contributions from employees and shareholders—but not with corporate treasury funds. That constraint had strong bipartisan support, equally exemplified by its inclusion in the 2002 McCain-Feingold Act on entrada finance reform.
Citizens United upset that settled arroyo. It gave corporate managers the freedom to spend unlimited sums of shareholder coin to influence political activity. With that conclusion, the Supreme Courtroom exposed corporations and our political process to a new and unhealthy dynamic of interactive influence seeking. The change in law non only enabled corporations to act more freely in the political procedure but also allowed politicians and involvement groups to demand that corporations give them money. Accordingly, information technology unleashed a host of issues for corporate managers, their shareholders, and other stakeholders.
Companies at present donate to help elect candidates they hope will do their industry's bidding or support a specific cause, even equally they publicly advocate for the opposite stance.
Nether the traditional sectionalisation of power in U.Due south. corporations, managers decide how to allocate corporate assets, and shareholders are entitled to a say on those decisions merely if they involve key transactions, such as major acquisitions or a substantial sale of the corporation's assets. Thus, even as corporate political spending has soared since Citizens United, shareholders take had no real say in the matter. Corporate leaders have non chosen to seek their approving for political donations, and virtually accept not even disclosed their contributions—despite the fact that shareholders are paying for them with their entrusted capital. Shareholders, employees, creditors, and society equally a whole remain largely in the dark about this spending.
A contempo study by Public Denizen, a nonprofit consumer advancement group, reveals large increases in corporate spending on elections since 2010, primarily via contributions to PACs. Spending on midterm elections rose in detail, more than doubling from 2010 to 2014, and and then doubled again from 2014 to 2018. Non but that, but corporations are the predominant contributors to the huge growth in so-chosen 527 organizations since 2010. These taxation-exempt organizations, named for the department of the U.S. Internal Acquirement Lawmaking that allowed their creation, pool money from diverse sources and apply it to accelerate broad political agendas under less scrutiny than PACs receive.
Even when it comes to traditional concern decisions, academic inquiry has focused for years on the reality that management does not always utilise its control of a visitor's money to benefit the company and its shareholders, whether out of myopia or self-interest. In the fields of corporate finance and governance, this is referred to equally an agency trouble. Academics and policy makers have generally advised that shareholders exist given greater influence and command over corporations to address this misalignment of interests. A leading proponent of that position is Lucian Bebchuk, a professor at Harvard Law School, who has argued that shareholders should exist able to meliorate the corporate charter (which determines the visitor's most important governance provisions) and have greater influence over other corporate decisions.
Of course, the misalignment is particularly pronounced when the decision is about which politicians or parties should benefit from corporate largesse—an issue on which shareholders have no mutual interest. Investing in a company—or, as most Americans do, in an index or other fund that holds a wide swath of companies—is not a political statement. For generations the scholarly consensus has been that the merely thing uniting company investors is their desire for a solid return. They take various political views and—as nosotros will highlight—no involvement in electing candidates merely considering they support i company's preferred regulatory policies. The power of corporate managers, who understandably have their own political views, to make contributions in a way that is faithful to their investors' diverse interests and opinions is rightly suspect, and for that reason demand is growing for shareholders to be given more information nearly and more say over corporate political spending.
The legitimacy problem this creates is easy to empathize. Corporate managers are more likely to place as Republican than are members of the full general public, which is closely divided amongst Democrats, Republicans, and independents. CEOs are also much wealthier than most other citizens, and wealthy people are more probable to vote Republican. Obviously, if executives direct political contributions according to their personal preferences, they volition donate to candidates and committees with views contrary to those of many of their shareholders, employees, and customers.
In 2019 researchers at Harvard Law School and Tel Aviv University ran the names of all individuals who had been CEOs of companies in the S&P 1500 from 2000 to 2017 through federal campaign-finance databases, which record contributions to party committees as well as to congressional and presidential candidates. They found that nearly 60% of CEOs donated to Republicans. The same Public Denizen study merely mentioned plant that from 2010, when the Citizens United decision was issued, to 2020, corporations gave $282 million to Republican candidates, versus $38 million to Democratic candidates. This is far out of balance with the American public, which, if anything, tilts slightly Autonomous and is composed of more than independents than Republicans or Democrats, according to Gallup. This, we stress, is only what we know. It seems likely that corporate dark-money contributions non now subject to disclosure are even more out of balance.
A CEO may contend that he or she supports only politicians and legislation that hew to the visitor's preferred regulatory line, and that it just so happens that those politicians are more likely to be Republican. But ofttimes politicians whose views align with a item corporate involvement too have positions that are antithetical to a company's stated EESG values, which underpin its program for long-term value cosmos. And even if a politician'south views aligned perfectly with all the interests of the corporation, shareholders might prefer not to have its treasury dollars spent in this way.
One important reason is that most investors hold a broad portfolio of stocks reflecting the whole economic system. They don't desire their dollars to exist spent on political rent-seeking by a specific company, which helps one visitor only causes externalities for other companies, taxpayers, and consumers similar themselves, and therefore is likely to slow real overall economic and portfolio growth. Information technology is more probable to entail at all-time a transfer of value from 1 company to another and at worst an increment in externalities borne past lodge in full general. For example, a diversified investor does not do good when a regime contractor spends invested dollars to secure a contract that another (perchance more than qualified) company in the investor'south portfolio might otherwise take gotten. Nor does that investor benefit when companies lobby to reduce regulation that shifts costs from investors to taxpayers in the case of, say, ecology devastation.
Beyond the fiscal risk, diversified investors are human beings who pay taxes, exhale air, consume products, invest in the whole economy, and owe much of their wealth to their access to a job. Thus bipartisan back up from Americans who oppose political spending past corporations is long-continuing. If people desire to give to politicians, they want to utilize their own money, not have corporations do it for them. A telling proof of this bespeak is that mutual funds, which make upwardly the majority of a typical visitor's shareholders, can't legitimately give their investors' money to corporate PACs, which let companies to fundraise from employees and shareholders to support the company's political activity. And individual investors practise not give to corporate PACS either, considering they prefer to straight their contributions to the candidates and causes that all-time marshal with their overall values. Indeed, corporate leaders don't even seek contributions from shareholders, knowing they would exist met with atheism and rejection.
Shareholders, employees, creditors, and society as a whole remain largely in the night near corporate political spending.
Furthermore, research suggests that companies that spend heavily on politics perform more poorly than others. For example, a study of corporate political activity in the form of lobbying and PAC spending by South&P 500 companies from 1998 to 2004 (conducted by John Coates, a Harvard professor who recently served as general counsel of the SEC) found that it was strongly and negatively related to visitor value. That issue may resonate with some business executives: When companies feel they have to compete on regulatory shortcuts rather than on productivity and innovation, they may exist poorly positioned to produce sustainable profits by selling quality goods and services and evolving to encounter new consumer demands.
As further evidence of their growing dissatisfaction with the mail–Citizens United status quo, investors are submitting and supporting proposals demanding greater disclosure of political spending. In 2019 shareholders initiated 33 such proposals, a dramatic increase from the previous year, and those proposals secured support averaging 36% of the vote. In 2020, back up for such proposals was even greater.
The Hypocrisy Trap
Investors and employees are not lone in opposing this state of affairs. Our conversations with corporate leaders reveal that many of them are tiring of the current organization because it distracts them and shifts resources away from other, value-creating activities. A 2013 report from the Committee for Economic Development of the Briefing Board found that 75% of surveyed business executives believed that "the U.Due south. entrada finance system is pay-to-play," and 87% said the organisation "needs major reforms or a complete overhaul."
Indeed, companies' "freedom" to donate to politicians after Citizens United ultimately led to a trap for corporate direction. Nether prior law, when corporations could not say aye to solicitations for political donations, they were not even asked. They could give through a PAC only, and that organisation put limits on fundraising and spending. Instead of being forced to support positions and candidates that their investors, customers, and employees disfavored, executives could focus on their core job of running their businesses.
After Citizens United,politicians, political party committees, and industry groups knew that corporations could spend as much as they wished. That put executives under pressure to give. Now that political donations are unrestricted, it's hard to say no. And once an executive says yes to ane, pressure comes to say yes to all. How tin can you requite to just the Republican members of the Senate Finance Commission? Or just the Democratic members of the House Commission on Energy and Commerce? Furthermore, managers may rationally fright that by failing to give when all other companies are giving, they will lose the power to influence regulation. Thus corporate political spending has get a unsafe and unprincipled game, leading many concern leaders to long for the former rules.
Ricky Linn
These conditions are exacerbated past increased business over EESG and corporate social responsibility. Corporations are facing force per unit area from employees, customers, society, and even investors to be more enlightened of the effects of their deport. Executives are responding past speaking out on climate change, racial and gender diversity, employee rights, and even hot-button problems such as reparations and a adult female's correct to choose. And withal pressure persists to donate to candidates and legislators, particularly those who favor the company'due south preferred regulatory policies, putting the company at an almost unavoidable risk of ensnaring itself in the hypocrisy trap.
It is unsurprising that companies are at present being called out for talking in one way and giving money in another. Consider the scandal that embroiled Target when it contributed $150,000 to a nonprofit organization in the company's home state of Minnesota that supported a Republican candidate's campaign for governor in 2010. Target claimed that the donation was intended to foster a better business climate in the state, but critics quickly pointed out that the candidate opposed LGBTQ rights and had fabricated homophobic comments in the past. Particularly damning for Target was the fact that information technology has worked difficult to portray itself equally committed to multifariousness, such equally by sponsoring the Twin Cities Pride Festival. This perceived hypocrisy drew a strong backlash from customers, who boycotted the company's stores, and from shareholders, who brought along a proposal asking Target to overhaul its political-donation policies.
The Solutions
Substantial negative publicity most donations in conflict with companies' stated EESG values has moved some businesses to consider reforming their political spending practices. Merely progress has been slow. To its credit, Target established a board-level commission to oversee political donations in response to complaints about its involvement in Minnesota'due south gubernatorial race. Recently other companies have gone even further, taking the brave step of unilateral political demobilization. For case, later on the January 6 storming of the Capitol, Charles Schwab close downwardly its PAC "in light of a divided political climate and an increase in attacks on those participating in the political process." Likewise, BlackRock suspended political contributions, stating that it "will acquit a thorough review of the events and evaluate how nosotros will focus our political activity going forward."
We applaud these approaches. There is no such thing as a legitimate corporate political donation plan, nor can ane fully safeguard the company from the adventure of contributions to candidates and interest groups with views reverse to the company'south stated values. As a result, the best business practice is for CEOs to pledge that the corporation will brand no donations with treasury funds and to limit interest in the political process to lobbying or speaking up on issues that the board has deemed consequent with the company's values.
Merely such pledges may not spread, and even if they do, they may not last. In that location is a first-mover disadvantage to taking a stand to limit corporate donations when others—especially competitors—are withal making them. Regulatory limits would assistance; but cheers to Citizens United and other judicial decisions, these donations cannot easily be restricted by legislative activeness. That said, companies that take the lead may attract positive responses from major investors, key stakeholders, and consumers, and find that countervailing first-mover advantages justify being willing to lead.
If a company lacks the will to ban political contributions entirely, information technology should commit to giving only through a PAC that raises voluntary money from employees and shareholders. Even then, the visitor should commit to having the PAC requite only to candidates and committees whose total range of views align with the visitor's stated purpose and values. That ways devoting management and independent director time to researching the records and views of potential recipients and watching how those views evolve. As important, the company should ensure that the PAC does not give to political party committees of any kind or to industry political committees that don't fully disclose their contributions and expenditures and don't restrict their contributions to identified candidates and causes that the company can screen for consistency with its stated purpose and values.
Some companies may be reluctant to take this approach and may wish to continue making treasury expenditures. For them, additional action must be taken. They should commit to making contributions simply nether a political spending plan approved by a vote of the shareholders (at the visitor'southward annual meeting and, ideally, by a supermajority)—an approach endorsed by the belatedly investment fund legend Jack Bogle and proposed in several bills pending in Congress. That would heighten the legitimacy of corporate spending, because management would need broad investor approval for any spending policy. The reality, of course, is that shareholders may vote against such plans. But if they do, can management maybe claim that it is faithfully discharging its fiduciary duties?
Under this approach, directors would have a critical role to play in implementation. The lath should accuse an existing committee of contained directors—the same committee that is charged with legal compliance and EESG policy oversight—to develop and corroborate a company policy governing political expenditures and to supervise its implementation as well as its risk. The committee should not only ensure shareholder approval simply besides assess how employees and customers are probable to react to the policy. Once a policy has been instituted, the committee should review and approve any political expenditures for consistency with the plan and with the company's EESG values and policies, with input from key managers. Finally, it should ensure that all contributions fabricated to candidates, political parties, political organizations, trade associations, or other taxation-exempt organizations that engage in political action, whether by the visitor directly or past its PAC, are publicly disclosed.
Because some companies will most likely be unwilling to reform their political spending, diversified investors should proceed to demand disclosure and button for the limits we describe here, via shareholder proposals and appointment, beyond all the companies in their portfolios. Institutional shareholders in particular should require that whatever political spending be done under a plan adopted by a supermajority of shareholders.
. . .
We can discover no sound concern justification for corporate political giving as it is expert today. Putting bated the larger problems for society and for the basic fairness of our democratic process, pouring corporate money into politics solely for company-specific turn a profit seeking completely lacks legitimacy. Investors don't benefit from this state of affairs, nor exercise corporate executives, who are pressured into giving in means that undermine their business concern focus and create substantial run a risk.
We have outlined diverse steps that companies can accept to ameliorate the legitimacy of their corporate giving, but the all-time remedy would be to stop information technology altogether. That would gratuitous management to focus on running quality businesses that compete on innovation and productivity and would avert illegitimate, time-consuming, and reputation-harming political activeness. Public respect for business leaders would grow—and so would trust in the fairness of our political arrangement.
A version of this commodity appeared in the Jan–February 2022 issue of Harvard Business Review.
Source: https://hbr.org/2022/01/corporate-political-spending-is-bad-business
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