NATIONWIDE: An Introduction to Political Law
Corporate Social Responsibility: Reevaluating Political Activity Compliance in the Current Election Cycle
Recent election controversies, proposed federal agency rules, state and federal legislation, shareholder activism, and resulting litigation have placed corporate political activity in a contentious crossfire, with stakeholders and third parties calling on corporations to better define their commitments to social responsibility. As we move into the 2024 Presidential election cycle, expect to see both an increase in corporate political activity and scrutiny on compliance with such activity.
Political Compliance Framework
Traditionally, three areas of law (collectively called “political laws”) have established the legal parameters for private sector interaction with US federal, state, and local governments: campaign finance, lobbying disclosure, and government ethics. Demonstrating compliance with these areas of law has lessened controversy when corporations engage in political activities.
Watchdog pressure and shareholder demands have prompted increased transparency of political activity for many years. The events of January 6, 2021, put pressure on companies to be more transparent when responding to inquiries about their election-related activities and whether they align with stated corporate values. Even as contributions resumed unabated in the 2022 election cycle, many companies revamped PAC bylaws and fine-tuned contribution recommendation criteria.
The increased interest in corporations’ values and social impact has additionally shined a more intense light on lobbying. While the First Amendment prohibits any cap on lobbying activity, lobby laws mandate disclosure. Those reading lobbying reports may look for a corporation’s position on global warming, reproductive rights, and other social issues. Shareholder proposals and regulators increasingly call for enhanced disclosure of lobbying activity, directly and through trade associations, and many corporations publicly post such information on their websites.
Most companies believe that rigorous compliance procedures, enhancements to disclosure, and pressure-testing of processes in the last election cycle may be sufficient to address present and future controversies. However, stakeholders are asking more pointed questions, while regulators now seek to establish new legal frameworks.
Federal and State Attempts at Regulation
Increasingly, Corporate Social Responsibility (CSR) considerations impact government ethics issues, including evaluating potential conflicts of interests, the hiring of former government officials, and payments to nonprofit organizations related to or made at the request of government officials. The demands and countermands under the rubric of Corporate Social Responsibility (CSR) correlate with a focus on Environmental, Social, and Governance (ESG) measurements and Diversity, Equity, and Inclusion (DEI) goals.
The political law framework of campaign finance, lobbying disclosure, and government ethics laws described in this article has been largely in place, periodically enhanced and overseen by federal and state ethics agencies, since the Watergate era. Whether this current period of attempts at new regulation will fundamentally change the status quo remains in question.
For example, at the federal level, the Securities and Exchange Commission (SEC) has expressed support for the development and implementation of new political spending disclosure rules as a matter of corporate governance. In recent years, however, the SEC has been – and continues to be – limited by Congress not to directly regulate political activities through the passage of the 2023 Appropriations Bill (Section 633). We expect to see this same restriction in the 2024 Appropriations Bill.
In the absence of a political disclosure mandate from the SEC, the agency has moved forward with action related to climate-related disclosures, human capital, and board diversity. Separately, the Department of Labor recently promulgated a rule explicitly listing climate change as a factor that fiduciaries of private sector public benefit plans can consider. Although Congress acted to block this rule by resolution, President Biden vetoed the legislation. Shareholder proposals remain the dominant vehicle pressuring companies to make more disclosures.
Regardless of federal action, many states are using their pension systems to take stances on ESG issues. Pro and anti-ESG positions take the form of state laws, investment resolutions and policies, Attorney General opinions, and State Treasurer opinions.
What makes this political tug-of-war so complex is that there is no consensus as to what ESG investing means. “ESG” has become an umbrella term for different investment strategies and priorities. Some investors see ESG factors as material financial risks and argue that there is a financial duty to use ESG information to maximize returns. Standardization of ESG metrics and data will help reduce confusion and conflict and align ESG goals with the more established standards developed under political law compliance programs.
States are also attempting to regulate corporate board diversity, largely in terms of gender and minority representation, in pursuit of DEI goals. States have taken a variety of approaches including requiring board diversity, requiring disclosure related to board diversity, or urging board diversity through non-binding action. These efforts have been subject to litigation and shareholder derivative suits alleging lack of board diversity.
Business and Legal Community Response
The Business Roundtable, an association of CEOs of America’s leading companies, has over the past 40 plus years periodically issued its Principles of Corporate Governance. Every version since 1997 has stated that corporations exist principally to serve shareholders, holding to the dictum of economist Milton Friedman in an influential essay 50 years ago that “The Social Responsibility of Business Is to Increase Its Profits.”
However, the Business Roundtable released a new Statement on the Purpose of a Corporation in 2019 which focused on all stakeholders, not just shareholders. Although not as radical as requirements embedded in the Accountable Capitalism Act proposed by Senator Elizabeth Warren (D-MA), this statement generated front page news and seemed to signal a philosophical shift in the business community.
Cognizant of the need to define terms before creating laws, enacting limits, or finding consensus around best practices, a committee of the Business Law Section of the American Bar Association (ABA) has embarked on an effort to create a new legal framework related to CSR which recognizes ESG measurements and DEI goals, with clearer definitions and benchmarks.
Practical Guidance
What should a corporation do in the context of ongoing political law compliance? We propose the following steps.
Establish a Comprehensive Framework
A fulsome framework will consider issues that align with your company’s mission, core values, and public-facing positions concerning campaign finance, lobbying, and government ethics activities.
Define the Scope of Your Program
Once your company has thought through a big picture framework in a unified manner, clearly define the scope of your program in regard to your political law compliance. Determine the role of your corporate board. Think about what departments are key for establishing and administering your program. Management at all levels has a significant role in identifying and reporting risks and opportunities, relaying consistent messaging, and integrating framework considerations into day-to-day operations.
Develop a Proactive Plan
Make sure you have processes in place for monitoring, reporting, and addressing risks as well as potential opportunities. A proactive program should track federal, state, and local developments, benchmark against other companies, and monitor new risk areas.