BEST PRACTICE IN CORPORATE GOVERNANCE OF PUBLIC POLICY ADVOCACY ACTIVITIES

Best practice requires oversight and approval of significant public policy advocacy activities, expenditures and positions by a standing board committee of independent directors. Leading companies on this issue have recognized that engaging in public policy advocacy requires board oversight because it involves significant shareholder interests and can be intrinsic to the outcome of business strategy.

Businesses justify their public policy advocacy as intrinsic and essential to strategic management of their businesses, inasmuch as their business success or failure can be greatly influenced by government decisions. Top managers who recognize this dependence feel a responsibility to make known the effect of such decisions on their companies and to defend their companies’ interests against those of other companies or interest groups who are also active in the public policy advocacy arena. Executives see much of their public policy advocacy activity as essentially defensive efforts to ward off potential threats and to preserve a favorable context of public policy within which to operate their businesses. Despite corporations’ entwinement in political processes, there is little oversight, transparency or accountability.

If engaging on public policy advocacy is an intrinsic and important aspect of a company’s business, then boards of directors, as part of their fiduciary “duty of care”, have a responsibility to be informed about the company’s public policy advocacy activities and positions and to oversee them, just as they are bound to oversee other aspects of their company’s business strategy. The “duty of care” implies that the board must keep itself informed of material information about the company. Board functions include reviewing and approving management’s strategic plan and business objectives and monitoring the company’s strategic way. To the extent that a company’s public advocacy activities is part of its strategic plan and intrinsic to its success, then the board of directors has an obligation to oversee it. Boards of directors have a fiduciary responsibility to shareholders to make informed business judgments representing the best interests of shareholders and the corporation. As long as directors make prudent business judgments, they are shielded from liability should matters take an unfavorable turn. However, if directors are to make business judgments and use this as a shield, they must inform themselves of all material information. It is the right and obligation of every director to be informed . Being properly informed is essential to the directors’ reliance on use of the business judgment rule. If directors fail to inform themselves and the company’s public policy advocacy activities run afoul of the law or result in material losses to the company, directors are potentially at risk.

Compliance cannot always be taken for granted, even in large and prominent companies. Aside from the possibility of violations, management’s decisions regarding public policy advocacy might not be in the best financial interest of shareholders, however narrowly defined. Business public policy advocacy can lead to adverse publicity and reputational and other losses

Corporate public policy advocacy is becoming a key business risk. NGOs place the political activities of corporations and their associations firmly on top of the corporate responsibility agenda. Moreover, if public policy advocacy constitutes an important and intrinsic part of management’s strategic direction, then the risk arises that those strategic decisions are not correct. Decisions regarding public policy advocacy positions are at least as subject to error as are other aspects of strategy. They may well be more problematic. Most senior corporate managers have been immersed in their firms and their industries for decades. Yet, despite all the knowledge and experience brought to bear, many business strategies don’t succeed. Most corporate managers are likely to be less knowledgeable about politics, public affairs and political economy than they are about their own industries. Why should it be expected that companies’ public policy advocacy strategies are any less subject to error and failure than other aspects of corporate strategy or any less in need of board review and oversight?

In addition to their individual public policy advocacy, most companies belong and contribute to trade associations that also engage in public policy advocacy. Many such associations take conservative “lowest common denominator” positions on public policy issues, though these positions might not be consistent with the interests of the best positioned companies, which nonetheless go along with the herd in order to provide a unified industry front.

Corporations are obliged to conduct business to enhance financial profit and shareholder gain. The two are not necessarily synonymous. Shareholders’ interests in a company’s actions are not necessarily limited to their financial returns in dividends and capital gains. Shareholders are  also employees, consumers, taxpayers, pollution victims, general investors and citizens.

Company public policy advocacy may sometimes run against the interests of shareholders.  Across the table, corporate boards must recognize the broader interests of important shareholders. A large percentage of shareholders may be affected by public policy decisions on which the company is engaged in ways other than through their direct financial returns. The company’s position, if adopted, might have adverse effects on shareholders’ broader interests.

There are many examples of “successful” corporate public policy advocacy that has proven costly to shareholders as citizens, taxpayers and owners of other businesses.

Should corporate management engaged in public policy advocacy with broad societal implications, using shareholders’ money, with no oversight by shareholders’ representatives on the board of directors?

Best corporate practice requires that a company’s public policy advocacy expenditures and positions be overseen and approved by a committee of the board of directors, the majority of whom would be outside directors with a broad view of the economy and political horizon. Today many companies lack a systematic approach to management and disclosure of lobbying activities. The pressures on the rest of the corporate world to upgrade their governance systems on this issue are increasing. Important institutional investors as well as public interest groups have also called for greater accountability and transparency in corporate public policy advocacy.  Of course, although instituting a system requiring approval of public policy advocacy activities and positions by a standing board committee would be a move to adopt best practice, it is not a panacea. Some companies that have such a system in place have nonetheless carried out questionable public policy advocacy campaigns on various issues. In most instances, board members will see eye-to-eye with management or will ultimately go along with management recommendations even despite reservations. Ideally, board members involved in public policy advocacy oversight must be both sufficiently independent of management and capable of a broad and long-term view of their corporation’s place in society and the path toward its sustainable success. The best boards of directors do have this broad view of their responsibilities.

Conducting an Information Audit on Public Policy Advocacy

1. Company policy and procedures governing public policy advocacy, both direct and indirect, and grassroots public policy advocacy communications. [ a grassroots public policy advocacy communication is a communication directed to the general public that (a) refers to a specific legislation or regulation, (b) reflects a view on the legislation or regulation and (c) encourages the recipient of the communication to take action with respect to the legislation or regulation. Indirect public policy advocacy is public policy advocacy engaged in by a trade association or other organization of which the company is a member. Both direct and indirect public policy advocacy and grassroots public policy advocacy communications include efforts at the local, national, European and International levels.]
2. Payments used for (a) direct or indirect public policy advocacy or (b) grassroots public policy advocacy communications, in each case including the amount of the payment and the recipient.
3. Company’s membership in trade associations or tax exempt organizations that it supports or is a member of, that engage in public policy advocacy activities and payments made.
4. Examine  the philosophy, major objectives and actions taken by the organization supported.
5. Determine if the relationship carries reputational or business risks with a potential negative impact on the company and its shareholders.
6. Evaluate management’s rationale for its direct involvement in, or financial support of the organization to determine if the support is in the long-term best interest of the company and its stakeholders.
7. A description of the decision making process and oversight by management and the Board for making payments.
8. Assess current and potential future internal oversight governing the use of corporate assets for public policy advocacy purposes.
9. Risk to shareholders from the company’s public policy advocacy activities. Do public policy advocacy proposals lead to an increase in shareholder value?
10. Is the company’s disclosure comprehensive and readily accessible?
11. How does the company’s public policy advocacy expenditure policy and disclosure compare to its peers.

Proponents of corporate public policy advocacy expenses resolutions believe that disclosure allows shareholders to evaluate whether public policy advocacy is consistent with a company’s expressed goals and is being done in the best interests of the company and shareholders. Corporate reputation is an important component of shareholder value, and controversial public policy advocacy activity can pose serious reputational risks.

Opponents of disclosing public policy advocacy expenses have claimed that disclosure is a form of silencing speech. Yet disclosure does not prohibit public policy advocacy but instead enables shareholders to evaluate whether the public policy advocacy is in the interests of the company and shareholders. Undisclosed spending can present reputational risk, and shareholder proponents are seeking disclosure to ensure that boards of directors are monitoring this risk.

One large disclosure gap is undisclosed company payments to trade associations used to engage in public policy advocacy. Trade associations do not have to disclose their members or sources of funds used for public policy advocacy. Undisclosed trade association payments used for public policy advocacy allow companies to influence policy anonymously. To ensure company payments used by trade associations are being monitored, investors are asking companies to disclose all of their payments to trade associations that are used for public policy advocacy.

Board Oversight of Political Spending in the US

Institutional investors and others have increasingly called for more transparency about corporate public policy advocacy expenditures designed to influence legislation and regulation. Since 2014, more than half the shareholder proposals at public companies which concern political activity have included requests for actions related to public policy advocacy. Indeed, more than 40 percent of the shareholder proposals about corporate political activity disclosure have focused specifically on public policy advocacy.

Data from the 2016 Index of the Center for Corporate Accountability indicate that slightly less than half of companies in the S&P 500 require some level of board oversight of their political contributions and expenditures.

Board Oversight. In 2016, 47 percent of companies said their boards of directors regularly oversee political spending.

Board Committee Reviews Policy. In 2016, 34 percent of companies said that a board committee reviews company policy on political spending.

Board Committee Reviews Expenditures. In 2016, 38 percent of companies said that a board committee reviews company political expenditures.

Board Committee Reviews Trade Association Payments. In 2016, 30 percent of companies said that a board committee reviews company payments to trade associations.

In the USA, a firm majority (62 percent) of S&P 500 companies now includes mention of public policy advocacy in stated policies, and just over half disclose something about lobbying governance. Both seem to be affirmative responses to investor demands for more transparency. Board oversight of public policy advocacy also is increasing, growing to just over one-quarter, up from only 16 percent in 2013. Companies generally do not voluntary disclose to their investors how much they spend on lobbying: just 12 percent of the S&P 500, but 30 percent of the 100 largest companies.