Board Oversight and Monitoring of Political Contributions

The U.S. Supreme Court’s decision last week in Citizens United v. Federal Election Commission raises some new and profound challenges for boards of directors.  In Citizens United, the Court held that corporations have First Amendment rights to free speech, just like people do.  Following Citzens United, corporations can enter the political fray directly through exercise of speech rights, albeit not through direct contributions to a candidate.  Corporate involvement in political matters is not new, although until now it has had to be through PACs, trade associations, or other entities.  What does this mean for boards?

First, greater – and more expensive – political participation adds a new layer of risk.  Will corporate political speech impact the company’s reputation?  Will sales suffer?  Will the treasury be unduly depleted?  Can relationships with shareholders or other constituencies be impacted?

Second, boards will have to reconsider their oversight and monitoring policies with respect to corporate political involvement.  This decision rests on a corporate right of free speech, but who decides what that speech will be?  Does management have a free hand in choosing candidates?  My feeling is that boards should reexamine – or perhaps institute for the first time – policies relating to the corporation’s political involvement.  They must also ask themselves whether there is an effective set of procedures in place for board oversight and monitoring?

Third, boards must understand the new legal environment regarding corporate political involvement.  The Citizens United opinion is, to say the least, dense.  The federal law involved is intricate, and the impact on state laws is not clear.  Boards need to consult their counsel for a comprehensive look at and understanding of the new playing field.  Once the legal environment is understood, a review of compliance procedures is a must.

And, just to complicate matters, we don’t know yet how major shareholders will react to the new environment.  Will they take a position on corporate political expenditures?  Will they indulge in their own lobbying vis a vis the companies in which they have a significant stake?  Stay tuned.

Much remains unclear.  What is crystal clear, however, is that this issue should be on boards’ agendas immediately.

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