Report: As Corporate Political Activity Becomes Riskier, Companies Need a Full-Scale Review of Their Strategy and Relationships

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May 12, 2022, 09:00 ET

NEW YORK, May 12, 2022 /PRNewswire/ -- A survey by The Conference Board released earlier this year found that fully two-thirds of companies found the environment for corporate political activity to be challenging to extremely challenging. And nearly all (87 percent) believed 2022 would be at least as challenging. That is proving true, as the combination of the mid-term election year, contentious primaries against incumbents, redistricting, increased federal and state regulation, scrutiny by multiple stakeholders and the media, and pressure on companies to take a stand on a raft of hot-button issues at the federal and state levels are making 2022 especially difficult.

A new report by The Conference Board ESG Center provides several key recommendations to help companies navigate this environment:

Conduct a comprehensive inventory and risk assessment of the company's political activity.
Engage their boards in an annual discussion of the costs and benefits of each of these activities, with an eye toward simplifying corporate political activity and eliminating those areas that create the greatest risk.
Conduct a broad-based effort to educate external—not just internal—stakeholders about corporate political activity.
Make the affirmative case for how political activity advances the company's business and broader societal purpose.
Do not overpromise: steer clear of unrealistic statements that the actions of those they support will always be consistent with the company's values.
Be ready for, but do not always respond to, provocative statements by politicians and actions by legislatures.

The report's insights are based, in part, on a roundtable convened under the Chatham House Rule with corporate executives, directors, and experts. The report also includes insights from—and is a follow-up to—a survey released in January, which gauged US corporations about developments in corporate political activity and their expectations and plans for 2022.

"The case that companies make for their political activity needs to go beyond the legal argument that corporate lobbying and contributions are constitutionally protected activities," said Paul Washington, co-author of the report and Executive Director of The Conference Board ESG Center. "If companies engage in political activity, they need to stop playing defense, and instead emphasize how their political actions not only advance the firm's business interests, but also serve a social and/or environmental purpose that is tied to the core business."

The Conference Board report was developed with support from Altria, Prudential Financial, Sempra, and Steptoe & Johnson. The report offers the following findings and insights:

Risk Awareness: Develop Comprehensive and Up-to-Date Assessments of Corporate Political Risks

Today's landscape for corporate political activity is fraught with risk:

A midterm election year: In this midterm election year, 87 percent of companies say the 2022 environment will be at least as challenging as 2021—with 42 percent believing it will be even more so.
High-stakes regulatory activity: The Federal Elections Commission is considering multiple complaints about corporate in-kind contributions to campaigns. In addition, the US Department of Justice has stepped up enforcement of the Foreign Agents Registrations Act, and several states are restricting lobbying or political activity.
Growing scrutiny from multiple stakeholders, especially employees: Given the increasing pressure they are putting on companies, employees are the most-cited group that companies plan to focus on educating this year about their corporate political activity.
Donations to third-party organizations: Donations to super-PACs and 501(c)4 organizations are particular sources of risk, given these groups may unexpectedly take controversial stands.

Companies need a full picture of their political activity, including routine updates from third-party orgs:

Companies need to maintain a full inventory of their corporate political activity and up-to-date information on the risks associated with each.
Companies should not just conduct due diligence at the outset of the relationship with a third-party organization. They should request regular reports from the organization about its activities. An organization that refuses to do so is a red flag.

Strike a Balance: Regularly Evaluate the Costs and Benefits of Corporate Political Activity

Companies have significant discretion regarding the level of their political activity:

Most large companies, those in regulated industries, or whose business could be significantly affected by government action will likely want to lobby. But they have a choice as to how much advocacy they want to conduct directly versus through third parties.
Corporate PAC and direct corporate contributions come with tradeoffs: They can give the company and employees greater access to political leaders. They also, however, increase reputational risk when—not if—recipients take positions at odds with corporate values.

Routine analyses can help companies make a more compelling case for their political activity:

Companies should conduct annual, or at least regularly scheduled, cost-benefit analyses of their corporate political activity and share them with their boards.
Doing so will better position companies to articulate to all stakeholders how their political activity serves a business and societal purpose.

Education for All: Conduct a Broad-Based Campaign to Educate Stakeholders

On the upside, most companies plan to educate internal stakeholders:

72 percent of companies entered 2022 planning to increase efforts to educate stakeholders about their corporate political activity.
Most efforts are focused on internal constituencies: employees, senior management, and the board.

But few companies plan to educate key external stakeholders—a risky omission:

Less than a third entered 2022 planning to focus on investors, policymakers, and the media.
Companies should not leave investors in the dark regarding corporate political activity. Shareholder proposals on the topic are more likely than any other broad category of environmental or social proposals to go to a vote, and receive relatively high levels of support, at annual shareholder meetings.
There's also a strong case to be made for educating policymakers, given that they have not always reacted favorably to adjustments in PAC giving, the stances that companies have taken on social and environmental issues, or corporate giving in general.
Educating the media is also a necessary endeavor, given that traditional and social media help inform the views of employees, customers, and investors.

Be Ready for Provocation, But Resist the Temptation to Always Respond

Expect continued scrutiny and surprises, during election years and in the off season:

Companies do not need to respond to every statement by a politician or action by a legislature. But they should be prepared for provocative actions by policymakers, and scrutiny by stakeholders, to continue—and in some cases, intensify.

A playbook should anchor a company's strategy for responding:

Companies should ensure that their playbook includes standard procedures for deciding whether, when, and how to respond to the latest incident where stakeholders are pressuring them to take a position.

"While developments at the national level often dominate the headlines and airwaves, activity at the state level can have a profound impact on a company's political activity and reputation," said Bill Black, co-author of the report and Program Director of the Government Relations Executives Council at The Conference Board. "Significant regulatory activity is underway in many states, relating to lobbying reform, campaign finance reform, and election registration and voting rules. Moreover, it is at the state level that hot-button issues often arise. To reduce the risk of being caught off guard, companies should be sure to devote attention and resources in states where they have substantial business operations, workforces, or customers."

Manage Expectations: Don't Overpromise

Candid conversations can help set more realistic expectations:

Companies need to be candid with stakeholders—especially PAC donors and other employees—that the company and PAC may support candidates whose values do not comprehensively and consistently match those of the company.
It is challenging enough to ensure that a company's own actions align with its stated values. It is virtually impossible to be confident that the actions by a candidate or third-party organization will always be consistent with a company's values.

Communicate the processes in place for managing risks:

In their communications with stakeholders, PACs and companies should avoid statements that the actions of candidates, campaigns, and organizations they support will consistently reflect company values.
They should explain the role that the organization's values have in governing the firm's own actions, and the controls in place to manage risks associated with those individuals and organizations that receive their support.

Lobbying: Focus on the Long-Term

The mid-term elections, plus high-stakes redistricting, pose challenges to lobbying in the short-term:

Lobbying is traditionally difficult in a mid-term election year. The committee chair this year could be the ranking minority member next year. Additionally, incumbents are facing primary threats from challengers who often take more extreme positions.
Another hurdle is the redistricting process underway, with the stakes high both for individual members of Congress and the composition of the House of Representatives.

Focus on building bipartisan consensus, and strengthen your case with data and CEO involvement:

Despite the challenges, companies should not retreat from the legislative scene.
They should instead focus on building bipartisan consensus on issues, which can take considerable time. Getting the CEO involved and leveraging data can help strengthen companies' advocacy efforts.

Corporate PACs: Prepare for More Challenges; the Dust Has Not Settled

With most corporate PACs having already made changes, few plan to make more changes in 2022:

Most corporate PACs used the 2020-2021 period to update their policies and have now resumed contributions. While just 15 percent entered 2022 planning on making further changes, the other 85 percent should nonetheless be prepared to do so.

Corporate PACs should be prepared to adjust their donation criteria, and to expect more FEC scrutiny:

Moving forward, corporate PACs may still need to revise their criteria for donating funds in light of the company's evolving positions on social and environmental issues.
Many will also want to focus on procedures for soliciting funds and the associated programs they conduct. Ensuring those who contribute are comfortable with the PAC's approach will be critical.
They can also expect further regulatory efforts, including scrutiny from the FEC, about the process used to solicit PAC contributions.

About The Conference Board ESG Center
The Conference Board ESG Center serves as a resource, platform, and partner to help Member companies address their priorities in corporate governance, sustainability, and citizenship. www.conference-board.org/ESG

About The Conference Board
The Conference Board is the member-driven think tank that delivers trusted insights for what's ahead. Founded in 1916, we are a non-partisan, not-for-profit entity holding 501 (c) (3) tax-exempt status in the United States. www.conference-board.org

SOURCE The Conference Board