New Report Argues For Shareholder Scrutiny of Corporate Political Contributions(A)

A report released in February 2005 by the Center for Political Accountability (CPA) argues that corporate secrecy on political contributions harms shareholders by denying them information critical for evaluating management performance and company behavior. The CPA is leading a campaign to bring transparency and accountability to corporate political giving.
In the upcoming proxy season, more than 30 major companies are expected to face shareholder resolutions calling on them to disclose and explain the business rationale of their political contributions made with corporate funds and identify the corporate officers involved in the donation decisions. Trillium Asset Management is sponsoring several of these proposals, at General Electric, Southern Company, Johnson & Johnson, Merck and Eli Lilly.
The CPA is a nonprofit public interest group founded in October 2003. It coordinated a slate of similar resolutions in the 2004 proxy season. As a result of this activism, Morgan Stanley adopted a new policy giving oversight authority over political gift-making and policy to its board of directors. Morgan Stanley also agreed to disclose its soft money contributions on its website, as has Pfizer. (Trillium co-filed the 2004 proposal at Pfizer.)
The study, entitled “The Green Canary: Alerting Shareholders and Protecting their Investments,” says that company disclosure of corporate political contributions can alert shareholders to signs of possible management, reputation and financial problems that can depress a company’s stock price.
“Corporate secrecy surrounding political donations carries a high price tag for shareholders,” said CPA Co-Director Bruce F. Freed. “As we saw from the collapses of Enron, Global Crossing, WorldCom and Westar Energy, misbehavior aided and abetted by undisclosed corporate contributions can cost shareholders billions of dollars in lost value and can exacerbate shareholder risk.”
Under the current rules, companies are not required to reveal or account for their political contributions. Only the recipients of the gifts have to report them, making it difficult for shareholders, the media and the public to track business political giving. “The result is that shareholders know little, if anything, about corporate political donations and how the money is used,” according to CPA Co-Director John C. Richardson. “The Center has found that a significant amount of that money has been used to underwrite organizations and candidates that promote policies contrary to stated positions and practices of the corporate donors.”
Although companies are prohibited from contributing to political parties, they still are allowed to give at the state level and to independent political committees, popularly referred to as 527s for the section of the Internal Revenue Code under which they are organized and operate.
The report examined:
· The role of unreported political contributions in the downfalls of Enron, Global Crossing, WorldCom, Qwest and Westar Energy. All were the “poster children” of abusive corporate behavior over the past decade.
· The reputational risks that soft money contributions have created for such corporate giants as Union Pacific, SBC Communications, Pepsico, Coors Brewing and BellSouth.
· Corporate political contributions that appear to contradict company political contribution policies posted on their websites.
· The political accountability and contribution transparency policies and practices of 120 large cap companies. The CPA graded the companies’ performance.
· Company political contributions by industry peer group. The Center’s Corporate Giving Assessment identified companies whose donations appeared to be out of line with their peers.
The report found that:
· An overreliance by companies on political contributions to carry out their business strategies can indicate problems that could threaten the company’s underlying soundness.
· The failure of companies to conduct due diligence on their political giving and ultimate recipients can create reputational problems that could threaten shareholder value.
· Only one company, Morgan Stanley, disclosed its soft money contributions to its shareholders on its website and had its board of directors oversee its political donations and policies. A second company, Pfizer, reported its contributions made with corporate funds. However, it failed to provide for board or executive level review of contributions, a key requirement for accountability.
· More than 30 companies made political contributions that substantially exceeded those of their competitors, suggesting a waste of corporate money.
Common Cause has urged the big mutual funds to vote for the CPA model political disclosure resolution in the upcoming proxy season. In a report that highlighted fund opposition to the resolution in the 2004 proxy season, Common Cause said that fund managers need to put the interests of their investors first by supporting the resolution at companies whose stock they hold. The Common Cause report can be accessed at www.commoncause.org.
The report is available at The Center for Political Accountability.