Washington lawmakers, policymakers and think tanks are thinking big these days when it comes to governance. Hot federal topics at year-end include political spending, the Securities and Exchange Commission’s new conflict minerals rules and corporate taxes—each pertaining to board oversight of large-scale, complex systems.
Republican presidential candidates prepare to speak at a foreign-policy debate.
Political Spending
Ever since Citizens United, the January 2010 Supreme Court decision affirming corporate free speech in politics, board oversight of political spending has increased—to 31 percent of boards in 2011 from 23 percent in 2010, says a new study. The Investor Responsibility Research Center and Sustainable Investments Institute highlighted the trend in Corporate Governance of Political Expenditures: 2011 Benchmark Report on S&P 500 Companies, released in November.
The IRRC/Si2 report also revealed that more boards are overseeing what trade associations their companies join. Oversight of 501(c)6 memberships increased to 24 percent from 14 percent; 501(c)6s are registered as lobbyists, unlike 501(c)3s (such as NACD), which have restrictions on their advocacy activities. There’s a correlation between oversight and dollars, as well: the bigger the corporate check, the more likely the board oversight. (Companies that say their boards oversee political spending spent 30 percent more in 2010 than companies lacking explicit policies, according to the report.)
Why does this matter? First, the money is not insignificant. Total figures for corporate spending disclosed in 2011 are not yet known, but an educated guess would put them north of $2 billion—with more dollars undisclosed. (Not all companies disclose all their political expenditures.) According to the IRRC/Si2 report, companies disclosed expenditures of $979 million for lobbying at the federal level, $112 million at the state level, and another $31 million spent on federally registered political action committees (PACs), for a grand total of $1.1 billion. That’s $144 disclosed per year for every $1 million in annual revenue recognized. This might not sound like much—only 1.4 percent— but in a corporation where only 10 percent of revenues goes toward payroll (as is the case in some industries), there’s a clear opportunity cost. Theoretically, a company employing 100 workers could hire 10 more with the money saved.
Second, political spending is a concern for a growing number of investors. A separate study, by Proxy Monitor, found that shareholder proposals on political spending have increased dramatically over the past four years at Fortune 150 firms—to 31 such proposals in 2011 from 13 in 2008. Most of the proposals merely call for transparency, rather than a ban. Indeed, the official policy of the trade group for investors, the Council of Institutional Investors, is neutral on political spending; it only wants transparency. Reading between the lines of many shareholder proposals, though, it is clear that one reason shareholders want transparency is because they are not comfortable with political spending to begin with. In part this is because some shareholders, such as unions, support causes and candidates opposing those that receive corporate support.
Also, political spending can have high stakes—particularly support of specific candidates, which corporations can only do through PACs.
In times of political polarization such as the current period, the victory of one candidate over another can usher in significant change. The 2012 elections, for example, could cause either a higher regulatory burden or an undoing of many existing corporation regulations, depending on which party wins. Obviously, companies have a stake in this; many would favor candidates who support low taxes for business, a lower regulatory burden, tax credits for investment and so forth.
Finally, some aspects of political spending are controversial. Under current campaign finance laws, companies cannot support candidates directly, but they can form PACs to make what are called “independent expenditures.” (In an independent expenditure, funds are spent directly by a PAC, rather than being contributed to the candidate.) In a panel presentation following the release of the IRRC/Si2 report, Charles Kolb, of the Committee for Economic Development, made a sharp distinction between lobbying, which the CED supports, and PACs, which the CED opposes on both economic and ethical grounds. Economically, says the CED, PACs are spending money better spent creating jobs. Ethically, said Kolb, it is wrong to think that one is somehow buying “access” to legislators or, worse yet, judges once they are serving. Some boards apparently agree. The IRRC/Si2 study reports that 15 percent of Fortune 500 companies say no to PACs, a slight rise from 12 percent in 2010.
SEC Weighs Conflict Minerals Rule
Another big-picture topic for America’s boardrooms is the issue of supply chains. This issue is much broader than any so far tackled in the post–Dodd-Frank era, and involves a relatively new governance issue. If passed, this rule could mandate corporate reports on the source of minerals used for products and packaging to ensure that they do not originate from sources (e.g., mines, smelters) in regions associated with violent conflict, such as the Democratic Republic of the Congo.
This proposed rule is subject to a wide range of possible outcomes, depending on whether the SEC listens to the activists who want to eliminate the use of conflict minerals at any cost versus the companies that need to reduce or eliminate their use of these minerals within a reasonable time frame and level of assurance. Including scrap and recycled minerals in the count, for example, would make the calculation extremely difficult. (For more on conflict minerals, see Keeping Count, page 16.)
To be sure, the notion of board oversight of supply chains is not entirely new. The Foreign Corrupt Practices Act, passed in 1977, required board oversight of global accounting controls, including payments to overseas vendors (a services supply chain issue). And companies that are signatories to some of the great social responsibility documents—the McBride Principles on fair employment, the Sullivan Principles for social justice, the Ceres Principles on the environment, the Caux Round Table Principles for Business and the like—all have included principles relating to suppliers. But for many corporate boards, thinking about the ethics not only of their companies but also of their suppliers is a new exercise.
Corporate Tax Overhaul
Several prominent CEOs—the leaders of Boeing, General Electric, McDonald’s, Starbucks and Wynn Resorts—have all called on Washington to lower corporate taxes, and it’s no wonder. According to the International Finance Corporation (part of the World Bank Group), the U.S. ranks only No. 62 when it comes to ease of tax burden on business—behind Djibouti, tied with Uganda, and just ahead of Lesotho. McDonald’s CEO Jim Skinner said in a November interview with The Telegraph, “In order to create jobs in America, you’re going to have to cut taxes… particularly in the business community.”
The 2012 presidential campaigns are full of talk about tax reform, but with any luck Congress may steal their thunder. By Dec. 23 of this year, Congress must vote on recommendations of the Joint Select Committee on Deficit Reduction (www.deficitreduction.gov/public/) on how to reduce the U.S. deficit by at least $1.5 trillion by 2021. Deliberations of the 12-member bipartisan panel, cochaired by Rep. Jeb Hensarling (R-TX) and Sen. Patty Murray (D-WA) are confidential, but based on reports in The New York Times and other news outlets, both sides want to reduce corporate tax rates and eliminate many deductions and credits.
While the reforms are not as sweeping as the flat tax plans being proposed by some Republican presidential candidates (including Herman Cain and Jon Huntsman), fundamental changes are in store for corporate taxes. If Congress fails to deliver and vote on an approved plan, $1.2 trillion in budget savings will be triggered through across-the-board cuts. These automatic cuts would be equally divided between defense and nondefense programs but would exempt Social Security, Medicaid and low-income programs.
One guiding source for the panel may be the recommendations of the National Commission on Fiscal Responsibility and Reform (www.fiscalcommission.gov), which has already issued its report. Corporate directors who served on that commission include David Cote, chairman and CEO of Honeywell International and a director of JPMorgan Chase & Co; and Ann Fudge, former CEO of Young & Rubicam Brands and a director of Novartis and Unilever— leaders of big companies requiring big-picture ideas.