Corporations are playing an increasing public role in some of today’s biggest hot-button conversations. More and more, their investors, customers, employees, and other stakeholders look to them to take a stand on issues such as climate change and racial justice. But, given the controversy around social issues like these, weighing in on sensitive topics may be riskier than ever.
These are uncharted waters for a lot of companies. Many boards of directors are asking themselves how they can help navigate them. With CEOs and other top executives increasingly making headlines for the stances they take, directors have an important oversight role to play.
What’s at stake
There’s nothing new about companies weighing in on public policy matters, even controversial ones, when they affect their business interests. That can mean public comments from CEOs or other executives. It can also take the form of corporate political giving. Companies believe supporting candidates will help ensure that their voices are heard when laws are being debated that may affect their business. The same goes for contributions to trade organizations and other groups that lobby and fund campaigns.
Now, compare that with the recent outspokenness of many companies and their leaders on social issues—sometimes with an unclear connection to their business interests. Whether you think this trend is misguided or long overdue, one thing is clear: It’s both a risk for companies and something that is increasingly being expected by stakeholders. That’s because when a company or its executives opine on social issues, they may well invite comparisons with their efforts to obtain policy outcomes that do affect its business. And though there may be compelling explanations for any perceived disconnect, they often aren’t easy to communicate to stakeholders.
There’s more at stake here than a little bad publicity. When a company is perceived by its stakeholders to be sending mixed messages, it may face serious consequences, including consumer boycotts, lost business opportunities, or serious damage to its brand and reputation.
Investors are focused on disclosure
The years-long push by some investors for greater transparency around corporate political expenditures should bring a greater sense of urgency to this conversation. There have been more than 1,000 shareholder proposals filed in the past decade seeking greater disclosure around corporate political spending and lobbying, according to As You Sow. This proxy season, they account for 18% of environmental, social, and governance (ESG) proposals, a larger share than any other topic.
Already, 260 companies in the S&P 500 disclosed some or all their political contributions or expenditures in 2020, according to the CPA-Zicklin Index, an annual benchmarking study from the Center for Political Accountability. That number has steadily increased in recent years. The trend, clearly, is toward greater transparency.
And there is reason to believe the SEC may step in. Citing “strong investor interest,” Gary Gensler, its new chair, has said greater disclosure requirements in this area could be appropriate.
Greater visibility into companies’ political expenditures will likely mean more questions about whether the way they participate in debates about sensitive social issues lines up with their efforts to achieve public policy outcomes that support their business interests. Companies would do well to be proactive here. Putting robust board oversight in place now can help reduce the risk of a costly and embarrassing disconnect later on.
The board’s role
Boards can help their companies mitigate these risks. Directors should feel empowered to ask management challenging questions about the risks and benefits of its efforts to shape public policy. Unfortunately, this is not universally the case. To take just one example, boards exercise some degree of oversight over political expenditures at just 52% of S&P 500 companies, according to the Center for Political Accountability,
What should boards be pushing for? To start with, if they historically haven’t been involved in discussions about which public policy outcomes, candidates, and causes to support, they may want to ask why—and ensure they’re kept in the loop next time. Directors should take a close look at the company’s policies outlining permissible types of expenditures. It also makes sense to review guidelines that lay out how management evaluates candidates to support.
Whenever a company or its leaders make a public statement on a sensitive subject, it’s a good idea to ask whether the board should be involved. Rather than answer that question on a case-by-case basis, it’s better to develop a framework. An effective one should identify the key political issues, spell out who the decision makers and spokespeople on the management team are, and specify how and when the board should be consulted. These frameworks need not be for public consumption; rather, their goal is to set clear expectations between the board and management.