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How Companies Can Limit Political Spending Risks

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With spending in the upcoming presidential election cycle expected to soar, how can companies take advantage of newfound freedom after the Supreme Court's Citizens United decision without being "Target-ed"?

The experience of Target Corp. provides a valuable warning of the serious risks that companies face. Target became the poster child for the pitfalls of post-Citizens United political spending when it faced a scathing backlash over a $150,000 political donation, had to apologize, and ultimately revised its political spending policy. But if companies follow emerging best practices for managing political spending, they can do so without becoming another Target.

After news surfaced about Target' s donation to a pro-business organization in Minnesota, the company was sharply criticized over the group's support for a gubernatorial candidate who opposed gay marriage. Target faced a boycott movement, hundreds of store protests, an anti-Target group on Facebook and a shareholders' resolution to revise its political spending process.

Dow Chemical, PepsiCo, Prudential Financial, Pfizer and UPS similarly took shareholder heat for their payments that helped underwrite the U.S. Chamber of Commerce' s controversial $30 million independent expenditure campaign in the mid-term elections.

The lesson for companies: Political contributions can have serious consequences. The Supreme Court' s Citizens United decision in January 2010 allowed companies, trade associations and unions to make independent expenditures. It ushered in a new era of political spending, laced with risk. Target's stumble, in turn, taught companies that their freedom to spend can cause more harm than good.

Political spending can carry risks for corporations, their boards and shareholders. An increase may attract scrutiny from investors, the media, the public and prosecutors. While the exact amount of corporate money pumped into campaign advocacy last year remains unknown, any increase should give business leaders pause. Given the record $4 billion spent in the mid-term elections, if a new Watergate-style scandal erupts, corporations and their shareholders could suffer.

More than half of the S&P 100-listed companies -- the largest in the U.S., and corporate governance trend-setters -- are managing the risks of political spending by voluntarily adopting disclosure and accountability policies. Most of these companies are disclosing not only their contributions but also their payments to trade associations and other tax-exempt organizations that are used for political purposes. The companies all have board review. These policies should serve as a model for all companies.

What's even clearer in the wake of Citizens United and Target's experience is that any corporation engaging in political activity without disclosure and a rigorous governance oversight process heightens its exposure to risk.

On the eve of the mid-term elections, The Conference Board, a leading business research organization, and the Center for Political Accountability, a non-partisan, non-profit advocacy organization, released a handbook on corporate political activity. This handbook lays out emerging best practices and straightforward steps to handle the increased threats. Key points include:

• Use a transparent, deliberative decision-making process for political spending. This not only helps deflect undue political pressure to contribute, but it also helps executives weigh the possible consequences of a contribution.

• Conduct strong board oversight of the company' s political spending, drawing on independent, objective counsel and expertise and evaluating possible risks.

• Scrutinize trade association memberships to protect against potential significant conflicts with a group on major issues and values that can ultimately impact a company' s reputation or bottom line.

• Maintain both an effective compliance system and an ethical corporate culture. Target, a company once recognized for its support of gay rights and diversity, has announced revisions to its political spending and oversight policy. But these pledges do not make clear whether Target will change its corporate culture. Until then, it will remain exposed to serious risks -- and a possible repeat.

Target's experience and the first election cycle after Citizens United ought to make companies mindful of a new era of political spending -- and more alert to its potential hazards. Prepared with the right guidance and groundwork, they can better protect themselves from embarrassment, or crisis.

Around the Web

Supreme Court Blocks Ban on Corporate Political Spending - NYTimes.com

President Obama denounces political spending cuts - MSNBC

Campaign spending by outside groups skyrockets - USATODAY.com

Boards take heat for political spending - Oct. 18, 2010