Should IR thank Jack Abramoff for his corrupt ways? Perhaps, if his lobbying scandal eventually results in standardized disclosure of corporate donations to political lobbyists.
The shamed former lobbyist is now facing nearly six years in jail for a range of offenses including hoodwinking casino-rich Indian tribes, tax evasion and conspiracy to bribe public officials. For now, Abramoff is delaying his time behind bars helping the Feds with their bribery investigation.
The case has created much media and public interest in lobbying, and now experts are weighing in on the long-term impact of the Abramoff affair. Some say it will change America’s political landscape forever, and it has already resulted in the first major change in lobbying rules in the US in over 25 years.
It’s also shaking up the investment community, with some funds highlighting the need for clear disclosure rules on corporate political donations. While it’s accepted that companies must be involved in the development of government policy, the process by which companies shell out donations requires more transparency, some investors say.
‘Any business should have very clear standards on how it engages with lobbying,’ says Karina Litvack, head of governance and socially responsible investment at Foreign & Colonial. ‘Companies should articulate clearly what their policy objectives are and put them on the web, so media, shareholders and others can see where these businesses are putting their financial weight.’
Litvack isn’t against political donations and doesn’t screen out companies for behaving in certain ways, but she is uncomfortable with many aspects of political lobbying. She feels that if companies are contributing to lobbyist campaigns, investors should know. ‘Our view is that it’s not for anyone to tell companies how they should behave,’ says Litvack. ‘But they should behave in a way that is in the interests of their shareholders.’
Better disclosure
This is the root of the issue for investors. If a company is spending money on political initiatives, should shareholders have a say in where that money goes – or, at the very least, should they be told about it?
Surprisingly, there are no requirements for companies to disclose information on their political contributions. ‘There needs to be disclosure not only of the contributions but also of the process a company goes through to determine who receives contributions, and how much,’ says Benny Hernandez, corporate governance adviser to the $3 bn Sheet Metal Workers’ National Pension Fund based in Alexandria, Virginia. ‘Also, they need to disclose their ultimate strategy and how it adds to shareholder value.’ Hernandez is also on the subcommittee for political and charitable donations for the Council of Institutional Investors.
Under pressure from labor, SRI funds, religious groups and pension funds, several large companies have begun to disclose details of political ‘soft money’ donations. This refers to money given to political organizations and advocacy groups as opposed to candidates or political parties. Eli Lilly, PepsiCo and Coca-Cola all post this information on their web sites. These companies have also agreed to have their boards oversee these expenditures.
Loopholes
There have been legislative efforts in the US to restrict political donations. The Bipartisan Campaign Reform Act (BCRA) of 2002 attempted to strap a tourniquet on the problem by controlling the flow of unchecked political donations, prohibiting soft money contributions to national political parties and independent political committees. But the BCRA left an opening by allowing soft money to be given to other organizations like the Democratic and Republican governors’ associations, which donate money to state races.
In other words, companies can still funnel money to political candidates and parties via trade associations and other tax-exempt entities. And in the case of trade associations and other tax-exempt groups, neither the donor nor the recipient are required to disclose anything.
A recent report by the Center for Political Accountability (CPA), entitled ‘Hidden rivers’, shows that corporations are contributing millions via trade associations and other organizations. ‘Despite the fact that the precise amount of money is unknown, anecdotal evidence provided by associations indicates it is significant,’ the report reads.
Bruce Freed, co-director at the CPA, says the lack of transparency surrounding corporate political donations stinks of scandal and feeds shareholder anxiety. ‘There is this feeling that something is wrong and that things are out of control,’ he says. Freed thinks the media should do more work tracing corporate political donations.
Not going away
The US Congress continues to debate the campaign donations issue. Despite upcoming mid-term elections, momentum surrounding the issue is likely to slow, according to Timothy Smith, senior VP at Boston-based Walden Asset Management. His firm controls $1.4 bn and frequently takes active positions on social, environmental and governance issues.
There is currently a proposed California legislation that would require companies to ask investors for approval of ballot measures and donations to state candidates. Supported by the California Labor Federation, it would force companies to provide shareholders with a list of donations annually and give them two months to review it and respond. Shareholders could then request a reimbursement of their pro rata share of the donation.
What’s clear is that this is an issue that isn’t going to disappear. ‘We’re now into shareholder season, with lots of stockholder meetings taking place, so there is media coverage of this issue,’ explains Smith. ‘And there is real energy and a real likelihood that many companies are going to take political disclosure more seriously. It’s also a simple good governance issue.’
