When Political Giving Doesn't Pay

As the 2008 presidential election hits full stride, your company may be inclined to shell out— through the legal channels of PACs, 527s, and other avenues—to the candidate perceived to be in the best interest of your company or industry. Before it does, however, consider this: New evidence suggests that political donations may not be good for most companies and might even signal that the company isn’t well managed.

In recent years, some institutional investors have argued that political contributions could come back to haunt companies. Led by a nonprofit, non-partisan group called the Center for Political Accountability, these investors have argued that corporate donations should be disclosed publicly so shareholders can assess any investment risks they may pose. They also call on boards to provide oversight of companies’ political spending.

The campaign has had surprising success, although it’s been a slow process. To date, more than 40 companies have agreed to disclose political spending, including Aetna, Adobe Systems, Coca-Cola, and United Parcel Service. Many acted in response to shareholder resolutions the Center filed with investor groups such as Calvert and Walden Asset Management. Directors largely support the initiative to require more disclosure of political spending. Some 88 percent of directors at Russell 2000 companies think companies should disclose all political spending, something they’re not required by law to do now, according to a survey in February of 225 board members by Mason-Dixon Polling & Research.

Five companies agreed to take a further step and disclose their payments to trade associations and other tax-exempt groups as well. They include American Express, Capital One, Texas Instruments, Washington Mutual, and Xerox. The Center has done studies arguing that some trade associations take positions that contradict the official policies of some of their corporate donors, posing risks for companies and their shareholders alike. “Political spending can create serious problems for corporate reputations,” asserts Bruce Freed, a co-director of the Center.

The Downside of Contributing

More worrisome to boards is some surprising evidence that political spending may be a sign of weak or misguided management. A recent study by Rajesh Aggarwal and two other management professors at the University of Minnesota’s Carlson School of Management raises troubling suggestions along these lines. Titled “Corporate Political Contributions: Investment or Agency?” the study examines the federal donations of companies in the Standard & Poors 500 between 1991 and 2004. The authors used a database from the Center for Responsive Politics that tracks political action committees, soft-money spending, donations to 527s, and donations by executives and other individuals affiliated with a company. (The data doesn’t include political spending at the state or local level or lobbying expenditures, either to elected officials or to regulatory agencies.)

One of the most startling findings of the Carlson study is that political donations are by no means standard fare, at least at the national level the paper measures. In any given year over this time period, only 14 percent of the country’s 13,000 or so publicly traded companies made any of these kinds of donations, the study found. More startling, only 34 percent of large, S&P 500 companies donated in a given year, according to unpublished calculations by the authors. Some 23 percent of them never made any donations in any of the 13 years. Examples include corporate giants such as McDonald’s and Reynolds American, the parent of RJ Reynolds Tobacco Co.

The first implication is that donations may not be necessary to a company’s welfare. After all, if there was any evidence that such stinginess was damaging, twothirds of the country’s largest companies likely would not refrain from doling out the necessary dollars.

Beyond that, the Carlson study finds that companies that do play the political game tend to exhibit a series of problems relative to those that don’t. For example, companies that donate more tend to have lower R&D and investment spending. Since the analysis looks at these factors over 13 years, it suggests that these companies may not be investing in future growth as much as the non-givers, and that management doesn’t have a clear strategic vision.

Even more worrisome, the authors found that donations correlate to lower stock performance. In fact, every extra $10,000 in donations is associated with a 7 basis-points drop in returns in the following year, even after adjusting for risk differentials. For the S&P 500, the drop was somewhat less, but still unmistakably negative at 5.5 basis points.