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Sightings: A Different Diversity

Sightings Winter12

 

HR: You're Doing It Wrong: "Zionist Jews Need to Be Run Out of This Country"

Columnist Laurie Ruettimann aims to clarify HR’s role in dealing with unacceptable behavior in and out of the workplace.

Workspace: A New Order

Columnist Alison Maitland argues for new workplace guidelines that offer flexibility—as long as the rules are drawn up with worker input and agreement.

Theory to Practice: Relatively Right vs. Wholly Wrong

Columnist Michael Raynor notes that the most important things are the simplest to understand, the hardest to do, and, as a result, the easiest to lose sight of.

Openers: Occupiers vs. Occupied

Occupy Wall Street isn’t just about inequality—it highlights the growing gap between companies and consumers.

Dangerous Terrain

Winter 2012

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With attention focused on the money that SuperPACs are spending to influence election results, companies are likely overlooking their own risks in the new campaign-finance system.

By Bruce F. Freed and Karl J. Sandstrom

Dangerous Terrain

Bruce F. Freed is president and co-founder of the Center for Political Accountability and co-author of The Conference Board’s Handbook on Corporate Political Activity. Karl J. Sandstrom is counsel of the Center for Political Accountability and of counsel to the political-law practice of the Washington, D.C. office of Perkins Coie. They both serve on the advisory committee of The Conference Board Committee on Corporate Political Spending.

That dreaded season is here, sooner than ever before. Thirty-second political TV spots are beginning to crowd out ads for cars and banks, glossy mailers are infiltrating mailboxes, and robocalls are dropping into voice-mail inboxes. Crossroads GPS and Priorities USA, representatives of a new breed of well-funded, well-connected political players, have already been on the air across the country for two months—their slashing TV ads launched fully a year before the upcoming election.

Over the next eleven months, pundits will lament the profusion and tenor of the ads, along with the astonishing sums of money funding them. And we’ll hear plenty of commentary and speculation about the sources of that money. Candidates will trumpet the number of small donors to their campaigns, but big funding this time around—as a result of a controversial Supreme Court decision—will come by way of third-party advocacy organizations and from corporate, trade-association, and union treasuries. The source of much of that money will be hidden from the public, offering a measure of anonymity for companies looking to influence elections.

This outsourcing of campaign spending is the single biggest change in how corporations must handle their political engagement, and if there were ever a time for businesses to be extra cautious in their political spending, now is that time.

The press, shareholders, and the public will all be closely watching corporate political spending; growing public cynicism about government and politics will cast corporate political spending in the worst light. Executives need to assume that their companies’ political activity will be subject to public scrutiny and debate. Social media, along with heightened shareholder and public concern, make it easier than ever for advocates to mount a noisy protest or boycott. Remember the mess in which Target found itself after giving $150,000 to a pro-business political group that also happened to oppose gay marriage. Or the criticism that Koch Industries has fended off after journalists exposed the extent of the company’s free-market political activism and use of shadowy conduits.

Of course, it’d be easy to counsel that corporations simply stop making political expenditures. But that’s not only unlikely—more on Howard Schultz’s no-contributions pledge later—but naïve. Most companies will continue to play the game because their competitors are staying in.

So the issue is how to manage spending. And the playing field looks very different this election cycle, in ways that carry new risks for companies determined to engage in politics. The risks go beyond a company’s reputation. They also involve exposure to political shakedowns and the danger that the money will be used for purposes that conflict with a company’s values and objectives.

The New 8OO-Pound Gorillas

No longer are candidates and political parties the only players seeking corporate support. Today, a variety of new players on the political stage—Super PACs501(c)(4) organizations, and trade associations—are asking corporations to underwrite their political programs. These third-party advocacy organizations are becoming increasingly prominent, displacing political parties as the principal advocates for candidates and causes. Though often associated with a prominent politician or political party, they are ostensibly independent. At the same time, some activists have figured out how to use them while concealing the true source of funding and the true object of the spending.

For companies, the dangers associated with supporting these organizations are qualitatively different from traditional support for candidates and political parties. When a company contributes to one of these outside groups, it cedes control over the use of its funds while remaining accountable to its customers, shareholders, and employees on how the money is eventually spent. These third-party groups determine how the money is used; they control the message and decide which candidates to support. A contributor’s own goals and intentions can be easily ignored. Lacking basic internal controls and external accountability, the groups spend as they please. And if that spending generates scandal—all too possible—a company giving money can find itself mired in controversy and, as a passive contributor, unable to control the narrative.

In this shifting environment, with new campaign-finance laws and guidelines—and new political organizations popping up overnight to support or attack candidates or proposed legislation—it’s no surprise that few companies are sure how to handle political spending. The U.S. Supreme Court’s decision in Citizens United v. Federal Election Commission altered the playing field for corporate participation, and the full impact of the expanded role of trade associations and the growth of the Super PACs and 501(c)(4) groups have yet to be fully realized.

What has occurred in just the last two years marks a near-tectonic shift in the political landscape, and corporations must decide how they are going to respond. This includes examining the costs and the dangers of outsourcing their political activity to these new players. At the same time, the uncertain regulation and the cloaking of the source and use of money going into politics poses a growing legal, reputational, and business threat to companies that spend. As companies face heightened pressure to spend more in politics, they find themselves with fewer tools available to track how their money is being used, which all leads to more risk related to political spending.

A Changed Landscape

How did we get to where we are today? First of all, campaign-finance laws and regulations have changed dramatically since 2010. Citizens United opened up new avenues for political activity for corporations, allowing them to spend unlimited amounts on ads advocating the election or defeat of a candidate. In addition, third-party groups spent nearly $300 million in the 2010 midterm elections, more than double the amount spent in 2008. The 2012 elections, expected to cost upward of $6 billion, will be defined by the new direction of political spending.

To be sure, not everything has changed: It remains illegal for corporations to make direct contributions to candidates in federal elections. But now corporations can have much greater influence with their political spending. Prior to Citizens United, corporations could finance political advertisements only through PACs, which are funded through voluntary contributions and must file frequent, detailed reports with the Federal Election Commission. Today, corporations can fund such ads, directly or through trade associations or 501(c)(4)s, so long as they do not coordinate with a candidate’s campaign.

These groups can function, in effect, as a separate fundraising arm for candidates, although they must follow the law to ensure that there is adequate separation. But the close association between Super PACs and 501(c)(4)s and candidates’ campaigns is almost inevitable, especially as these outside groups become more successful at raising funds than the campaigns themselves. Should there be an actual coordinated effort between the groups and a campaign and/or the government begins to watch Super PACs and 501(c)(4)s more closely, corporate involvement will be caught in the crossfire. State agencies are also starting to get more aggressive in their efforts to rein in the influence of Super PACs.

Often, these new organizations are associated with a particular candidate or political party. Priorities USA, for example, is a Democratic group associated with President Obama’s reelection campaign that runs attack ads against Republicans, while the American Action Network, a group led by former Republican senators and former campaign advisers, is running issue ads attacking the Obama administration’s policies. Supporters and former aides of presidential candidate Gov. Rick Perry founded at least seven Super PACs in 2011.

The new power of the Super PACs and associated advocacy organizations has reached stunning levels. A quick look at the Super PAC American Crossroads and its affiliated nonprofit 501(c)(4), Crossroads GPS, shows the strength of these groups to direct fundraising efforts. After raising $71 million through political and issue-advocacy efforts in 2010, the groups recently announced plans to raise $240 million by 2012.

Although these groups often work in a behind-the-scenes fashion, they can sometimes attract a lot of attention, which may or may not be good for those corporations that contribute to them. In 2011, for example, in California’s 36th Congressional District, Democrat Janice Hahn and Republican Craig Huey were fighting to replace retired Rep. Jane Harman (D) in a special election. The race garnered national attention when the Super PAC Turn Right USA produced an Internet-only advertisement that featured cursing rappers and a stripper imitating Hahn and gyrating on a pole. The spot was intended to criticize a program backed by Hahn to help former gang members but ended up being widely denounced, by both sides, as racist and sexist. Hahn won the election. But some company may indeed have donated to Turn Right USA and then been startled to see the results. The anonymity that campaign-finance laws now afford means that we’ll never know. Indeed, there’s much less accountability in political spending than there used to be. The movement toward disclosure that began with the Watergate-inspired 1974 amendments to the Federal Election Campaign Act and continued through the Bipartisan Campaign Reform Act in 2003 has now turned around. Because of their secrecy, advocacy organizations are free to transfer money to other organizations, clouding accountability and the traceability of funds. Such practices only exacerbate secrecy and risk for the companies that contribute to these groups.

As official regulation of political spending is weakened or eviscerated, it falls to corporations to police themselves. The consequences of weak regulation can be staggering. A 2009 International Monetary Fund study shows how mortgage lenders spent millions in political donations, campaign contributions, and lobbying activities to defeat legislation aimed at predatory lending. Their success in quashing a regulatory response that could have mitigated reckless lending practices and the consequent rise in delinquencies and foreclosures led the study’s authors to conclude that the financial industry’s political influence poses a risk to itself as well as to the economy. Weaker regulation can lead to lax practices, which further lead to a system that can veer out of control.

This confluence of changes—more money being spent by outside groups, increased secrecy, and weak regulation—could lead to confusing times for corporations that want to be engaged in politics. Some say the changes will bring back the days of the Watergate scandal, but the rules of the game have changed so much that a new kind of response is needed. The very practices of Watergate—corporate cash being funneled secretly to a campaign—are now on full, legal display. It’s the players in the new political-money world that are shrouded in secrecy, and the full impact of that secrecy is not yet understood. Over the past few decades the names of political donors have largely been disclosed, even by independent groups, but no longer. In 2004 and 2006, nearly all independent groups involved in politics revealed their donors, according to a report by Public Citizen. In 2008, fewer than half of these groups disclosed donors, and in 2011, less than one-third did. If companies continue to be a part of this “dark” part of political spending, they will find themselves even more at risk.

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The Conference Board Review is the quarterly magazine of The Conference Board, the world's preeminent business membership and research organization. Founded in 1976, TCB Review is a magazine of ideas and opinion that raises tough questions about leading-edge issues at the intersection of business and society.