The Hidden Dangers of Corporate Political Spending

A very interesting area of research to look at today, and it is around corporate political activity. Of course, we are in this midterm season and obviously lots of questions about the types of candidates that will win, but even more importantly, where this research is concerned, how corporations think about their linkage to political activity. And a pleasure to be joined by Wit Henisz, who is Professor of Management and Vice Dean at the Wharton School. Wit, great to talk to you again. How are you? Well, thanks, Tim. Thanks for having me.

So the aspect of corporate political activity, I think, is one that not as many people think about, but it's very important. And reading up on this, I guess it was Citizens United that really kicked off this wave of activity that we've seen in the last few years. I think Citizens United was a really important Supreme Court decision, but I think we overly focus on that one case. There was a series of six, eight, maybe 10 cases, if you had a legal scholar or a lawyer, they could walk you through all the decisions that just sort of gradually loosen the taps or open the taps. And Citizens United, and there have been one or two decisions since that

have continued that trend. So it was an important decision in a string of decisions that made more political campaign interventions and speech by corporations protected. I hope we can today talk more about the strategic and governance aspects as opposed to the legal, because even if we overturn Citizens United, even if we have a new president, we have a constitutional amendment or a new Congress that says Citizens United is overturned, we still have a lot of problems in the corporate finance, corporate political activity area. It's not just one decision. It was

an important one, but one in a long series. All right. So I'll talk about that in one second. But as you mentioned, the concerns that are out there, realistically, what are they right now? Well, I think there are two sets. One is sort of a reputational concern. So I'm going to start with the easy one. You know, there are a lot of companies that are engaged in some sort of speech around environmental, social issues. So they might say, you know, we're pro the climate transition or we support human rights of this type or we support women's rights of this type. And then they lobby

on legislation that does the exact opposite, either at the state or federal level. And that's not disclosed. Now, that's not a violation of law of any sort. But if it comes out that, well, you're saying you're this, but you're lobbying that, you know, that's a reputational concern. And boards and managers should be aware that somebody might call them out. Someone might say, hey, how can you lobby this way when you're saying that? And, you know, it seems inconsistent or it seems or you're giving a candidate, giving money to a candidate either directly or through a PAC that's supporting

the exact opposite of what you say you care about in terms of your purpose, in terms of your values. So that's just an alignment and a reputational issue. But the thing I really want to draw attention to, and you mentioned the midterms coming up, there's a whole host of serious legal concerns about illicit corporate giving, corporate giving that might constitute a quid pro quo. So there have been recent exposés around companies who got to send an email saying we'd like to have a waiver on the environmental, you know, environmental pollution restrictions for

air pollution and chemical pollution. Now, if you got those because you say gave $10 million to the ballroom or because you, if there's any sort of a quid pro quo where there's money for this in exchange for that, assuming one of the congressional chambers is controlled by the Democrats, they'll gain subpoena power. And I would expect there to be investigations into those kind of quid pro quo schemes. And so, you know, I mentioned the chemical regulation, but there have been high profile mergers. There is crypto regulation and legislation that's been going

forward. And so there are a number of prominent companies that have kind of been playing by the rules in the last two years, which are quite loose and might be held into account. And so you've really got to be concerned not just about the reputational hot potato, but the legal liability of some of the corporate political activity. And I want to be careful, I don't have any proof that there was a quid pro quo. But I'm just saying politically, it's likely there's going to be some investigations as to whether there were. So from a larger scale, when you think about the regulatory

side, why is it that we have this kind of landscape now? And I would think part of the answer is, it's just hard right now in Congress to get something through that really addresses these issues in the first place. Well, there's two issues. One, just to, I don't want to overly focus on Citizens United and other cases, but there's one that all of those cases kind of said, you know, the disclosure laws are where we should be putting our weight. Like if you're concerned about these issues, who's talking, who's saying what, you know, count on the disclosure

laws. And the problem is the disclosure laws are really weak. And so we don't have strong disclosure laws, especially through some of these independent 501c3, through these state level entities that can be created. So there's a host of ways of getting around the disclosure laws. And then we have other issues like the FEC no longer has a quorum, the Federal Election Commission no longer has a quorum to convene meetings to investigate any violations of the current disclosure law or other laws. The Department of Justice branch that is tasked with prosecuting

some of the things I'm hinting at, you know, the quid pro quo, it's been gutted, you know, all the people have been laid off. So we have some things on the books, they're not enough, but even the ones on the books aren't getting enforced because the FEC and the DOJ don't have the capacity to actually convene and adjudicate or investigate a process either, well, because people haven't been appointed, so you can't reach a quorum, or because people have been fired, and there's no one around to investigate, prosecute, look into these things. They're

looking into other issues at DOJ. You mentioned boards of directors. How should they approach this issue, this topic right now, especially as you said, the potential negative impact that it can have to firms of the types of stances and the types of positions they take, saying one thing, doing another, it's certainly a challenge. And then from the same perspective, I would think that investors would have a lot of the same concerns that boards of directors might have. Well, they should. And I think we're adjusting to a new reality in which these issues are going to be important liabilities that corporations face.

And so I think boards should be asking the question. One of the challenges on the reputational hot potato is sometimes you have one committee or one member on the board who is responsible for what we say in our sustainability report, what we say through our comms channels, and then there's another person who's responsible or another committee that's responsible for what we do in terms of government affairs. And so actually I have a paper with a number of colleagues that shows when you have separate board committees looking at those two issues,

you're much more likely to have disconnect between what you say and what you lobby for. So the first thing is the board should create a unified committee that looks at all the external facing speech and discussion and lobbying. So everything you're saying to the external stakeholders, including the government, there should be a single board committee that has oversight and make sure you're not doing one thing and saying the other. On the legal liability side, the board should be looking at this as an important potential source of risk and liability

for the corporation and even for the board members if there are these violations. And so I think we need to be asking the questions. I think the issue is there's been such pressure to comply, such pressure to give money here. Here's this new committee that's being formed to support the ballroom. Here's this new committee that's being raised to support something else. And then all of a sudden we see mergers being approved and this legislation being relaxed. And you've just got to wonder whether there's been some sort of deal or some sort of exchange

in that. And boards should be asking and investors should be asking. One of the things that you mentioned investors. As much as a lot of these shareholder proposals to push forward on the climate transition or push forward on human rights have gone away or gone quiet recently, the one sort of resolution we're still seeing a lot of is investors demanding that corporations disclose more of their political giving. And this is actually following the recommendations of the Corporate Political Accountability's recommendations, which sit under my purview

as Vice Dean of Wharton Impact. They've made recommendations saying, look, these are important sources of risk, of liability. And investors, shareholders, boards should be asking the questions. We're seeing more and more of that. And they're gaining support among shareholders. So there is some recognition, but we need to push further and get more disclosure of more types of giving into those resolutions. So then as we move forward here, does a lot of this fall at the feet of the board of directors and how they want to lay out what the stance, what the path

needs to be around these issues as we move forward down the road? And as you kind of alluded to, a landscape that is certainly it feels like it's a lot different than what it was, say, 20, 30, 40 years ago. Yeah. I think, unfortunately, in the current policy and regulatory environment, it is the board's responsibility. You know, in an ideal world, we'd have more campaign finance disclosure at a minimum. And then depending on where you sit ideologically, you might want different laws. I think everybody would sort of agree we want more disclosure. Almost everybody

would agree we should have more disclosure. But if we're not going to get that in the short term, it sits with the boards. It sits with investors to kind of self-police, self-regulate. And that's very imperfect. But what I want to call attention to and what the primer is trying to call attention to is there's a real risk, there's a real liability if these questions aren't asked, if there isn't board oversight, especially if we have a shift in congressional control and investigations that have subpoena power over conversations over prior giving.

And for people that would like to read the primer, where can they check it out? If you just go to impact.wharton.upenn.edu and you go to research primers, it's the most recent one we published on corporate political activity. And we're really proud to partner with the Center for Political Accountability and Bruce Freed together with the head of the Zicklin Center here and Bill Laufer in publishing that. I think it's a great synopsis of a lot of these risks, a lot of the legislation, a lot of the trends, and also has some links to some of the standards that Wharton and the Center for Political Accountability have supported, which every

board should be thinking about and considering as a way of reducing liability. Wit, great to catch up again. Thanks very much for your time. All the best. All right. Thanks, Dan. It's a pleasure. You got it. Wit Henisz, who is professor of management and vice dean here at the Wharton School.