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Politically correct corporate speech

Cindy Wolf //October 3, 2012//

Politically correct corporate speech

Cindy Wolf //October 3, 2012//

Citizens United v. Federal Election Commission and v. FEC changed the game on corporate political contributions. How? Corporations are now allowed to fund “electioneering communications” – which means they can fund broadcast advertising for specific candidates – as long as they don’t coordinate directly with the candidates.

So, the electioneering activities must be funded through third party groups such as PACs or Super PACs (IRS Code 527 organizations) and politically active nonprofits known as 501(c)(4)’s and 501(c)(6)’s. The latter include such groups as trade associations, chambers of commerce and “social welfare groups”.  For an entertaining explanation of how these groups work, see former FEC Chairman Trevor Potter’s interview on The Colbert Report.

Corporate America has jumped right in. The elimination of spending limits resulted in a quadrupling of corporate donations in 2010 as compared with the mid-term elections of 2006. Has this been beneficial for those corporations involved? Many believe it has. But as Target, Aetna and Chick-fil-A found out, unfettered political speech can have an unintended effect on their business. Customers may react well in support of the position advocated by the company, or they may react adversely and boycott the company.

Target faced a customer boycott when it contributed $150,000 to a group supporting a business-friendly gubernatorial candidate who also opposed gay marriage – in opposition to one of Target’s “core values”. Aetna inadvertently disclosed it had contributed $3 million to American Action Network, a social welfare group committed to defeating Obamacare, at the same time Aetna’s president was publicly supporting it. An embarrassing apology ensued.

Chick-fil-A, a long time contributor to various anti-gay organizations, created a firestorm this summer when its president publicly affirmed the company’s stance. Even though supporting customers ran their own Chick-fil-A Appreciation Day, the company spent months negotiating with various LGBT groups afterwards and recently publicly stated it would no longer support anti-gay marriage programs.

Corporations may believe that their political spending should not be a matter for public assessment but contributors to PACs and Super PACs are not confidential. Politically active non-profits do not need to disclose who donates to them, which means they get the bulk of corporate political contributions. However, that may change. In March, a DC District Court invalidated the regulatory provision that kept the contributors towards certain types of political advertising confidential. This ruling is percolating through the appeal process, but if it remains the law, the identity of every donor over $1000 will need to be disclosed starting back from January 2011.

While corporations have always lobbied public officials to pass friendly legislation, those activities are less obvious to the general public and usually are not controversial with shareholders. But these new rulings have brought corporate political spending to the attention of shareholders, as well as the marketplace. And shareholders may become impatient with corporate spending towards political causes they don’t support – or just in general. They may believe the money is better directed towards dividends or capital investment.

Studies on the benefits of political spending show that it is most beneficial for companies that have good corporate governance – which is pretty obvious when considering the gaffs perpetrated by Target and Aetna. But even companies with consistent political messages, like Chick-fil-A and Koch Industries, can get negative media attention for supporting controversial political positions and spend a lot of time and energy explaining and refuting misconceptions.

In response, one quarter of the S&P 100 companies have pledged not to make the independent political expenditures now allowed. A prudent approach for a company that chooses to make such expenditures should include thoroughly vetting the recipient, analyzing the marketplace risk and discussing the donation with its shareholders. Finally, disclosing the donation, whether required by law or not, should help minimize the shock from unexpected revelations.