By Kimberly Gluck, CFA
From the Winter 2011 Edition of Values

A series of questions with Tim Smith, Walden’s Director of ESG Shareowner Engagement, by Kim Gluck.

Walden: Why is the issue around corporate campaign financing and lobbying so important and timely in 2011-12?

Tim Smith: The upcoming presidential election will create a huge buzz around political spending and lobbying, regardless of whether the spending is by a company or a union. Companies have a right to participate in the political process, but we believe that shareholders have a right to understand how company resources are being used to impact both elections and public policy, and if these resources are being used in the long-term interests of the company. Further, boards of directors have a fiduciary obligation to understand and evaluate the risks of both political spending and lobbying.

Although many companies are being more transparent about their political spending by voluntarily posting information on their websites, very few also disclose lobbying expenditures and priorities on their websites. Since there is reputational risk to a company if misguided lobbying efforts come to light, Walden, along with dozens of other investors, is actively calling for transparency on this issue.

Aren’t companies already required by law to disclose their lobbying?

TS: Under the Lobbying Disclosure Act, companies are required to file quarterly reports showing the dollars spent on lobbying, the lobbyist name, year in which the lobbying was done and the lobby topic. The Senate maintains a database that can be accessed to determine whether a company has filed quarterly lobbying reports. We downloaded a report on Pfizer that showed since 1999, this company had lobbying expenditures of about $155 million (averaging about $13 million per year).1 However, such reports are not easily found by investors, do not provide full detail, and typically do not disclose lobbying via third parties or grassroots lobbying. Further, there is no consistent disclosure requirement at the state level. States have a patchwork of different regulations on lobbying that do not give investors a complete picture.

What are we seeking for an outcome?

TS: We are urging companies to disclose their lobbying, including work done through third parties such as trade groups or nonprofits. We also request information on the decision-making process and oversight of the lobbying program by the management and board. If companies are not receptive, Walden and other investors are filing shareholder resolutions to encourage companies to engage on this topic.

How are companies using third parties, such as trade groups, to lobby and influence public policy?

TS: Often a company will lobby directly through its own government affairs office, but it may also lobby through trade groups and nonprofit organizations. An example of the latter is the American Legislative Exchange Council, or ALEC. ALEC claims to be nonpartisan but its tagline is very telling: “Limited Government, Free Markets, Federalism.”2 ALEC is a conservative political group composed of corporations and elected state officials. ALEC drafts legislation that reflects a particular corporate agenda and offers it up as a model that can be sponsored by legislator members. While government officials are also members, 80 percent of the ALEC budget comes from corporations. There is deep secrecy around this organization as it does not disclose its membership nor are the bills that its members introduce connected to ALEC in any transparent way. We believe companies should explain how they try to change state and local legislation through ALEC.

Another area of concern is the lobbying done by groups such as the U.S. Chamber of Commerce, which purports to represent all of its members. Like ALEC, the Chamber has been an advocate for reduced regulation around environmental issues such as climate change and greenhouse gas emissions. However, this stance is inconsistent with many of its member companies’ commitment to sustainability and is likely not in their long-term business interests. For example, Accenture touts in its corporate citizenship report the fact that it has made the Carbon Disclosure Project’s Global 500 Carbon Disclosure Leadership Index for the second time, even though Accenture is also part of the Board of the Chamber of Commerce.

What companies are voluntarily reporting their lobbying and trade group spending?

TS: To date, only a few companies are disclosing information beyond what is legally required. The Center for Political Accountability (CPA) published a report in October 2011 showing that 57 of the largest 100 Standard & Poor’s companies disclose their direct corporate political spending and have board oversight, or they prohibit the use of corporate funds for the purpose of political spending. However, only 26 of those companies report the portion of their trade association dues that are used for political or lobbying purposes. As the CPA report notes, trade associations and tax exempt “social welfare” groups, known as 501(c)(4)s under federal tax law, can provide secret financing of elections as they are not required to disclose membership or donors. Further, the report says, “Corporations can make unlimited payments to trade associations and 501(c)(4)s. This funding poses a great risk that companies will be unaware of how their money, passed through a conduit group, is spent for political purposes. It also poses a risk that a company’s payment could be leaked or inadvertently disclosed and could create problems for the company.”3

According to American Federation of State, County, and Municipal Employees (AFSCME), the Chamber and seven other large trade groups received in excess of $1.3 billion in contributions in 2009. Tax records show that these groups used $500 million of those funds on lobbying and other political activity. Thus, some large trade groups spend close to 40 percent of every dues dollar on “lobbying,” which, of course, is not tax deductable by the companies. We believe that shareholders would benefit from reporting, made available on companies’ websites, that discloses public policy priorities and explains board oversight of lobbying as a way to minimize reputational, regulatory, and other risks.