POLITICAL RISK MANAGEMENT.

AuthorSimmons, Omari Scott

TABLE OF CONTENTS INTRODUCTION 711 I. CORPORATE POLITICAL ENGAGEMENT, PAST AND PRESENT 715 A. Corporate Political History 715 B. The Contemporary Moment 718 C. The New Wave of Populism 721 D. The COVID-19 Pandemic 722 II. POLITICAL RISK AS AN ELEMENT OF ENTERPRISE RISK MANAGEMENT 723 A. Enterprise Risk Management (ERM) 723 B. Aspirational ERM Design Considerations 726 C. Political Risk Management 727 1. Status of Academic Political Risk Research 727 2. Defining Political Risk 728 3. A Taxonomy of Political Risks 730 4. Integrating Political Risk Management with ERM 733 5. Proactive Versus Reactive Political Risk Management 734 D. Governance Structure and Political Risk Management 735 1. Corporate Functions 735 2. C-Suite 736 3. The Board 736 4. Board Political Independence and Awareness 737 5. Political Risk and the Court of Public Opinion 738 6. The Challenge of Quantifying the Impact of Political Risk 739 III. CORPORATE LAW, CAREMARK, AND POLITICAL RISK OVERSIGHT 743 A. State and Federal Statutory Support for ERM 744 B. State Corporate Law 745 1. Business Judgement Rule 745 2. Common Law Jurisprudence 747 3. Evolving Oversight Jurisprudence and Caremark 748 4. Marchand and the New Directions in Oversight 750 C. Predictions for Risk Oversight 754 D. Political Risk and Oversight Liability 755 IV. PROACTIVE AND REACTIVE RESPONSES TO POLITICAL PRESSURES 757 A. Proactive Manifestations of Corporate Political Power 758 1. Lobbying 758 2. Corporate Political Spending 759 3. Corporate Charitable Donations 762 4. Government's Revolving Door 763 5. Public/Private Collaboration 765 6. Expertise, Capacity, and Informational Advantages 766 7. The Corporate Bully Pulpit and the Power of Persuasion 767 B. External Political Pressures Prompting a Reactive Corporate Response 771 1. Investors and ESG 771 2. Consumer Sentiment 772 3. Political Actor Maneuvering 773 V. POLITICAL RISK, POLITICIZATION, AND CORPORATE PURPOSE 775 A. The Debate 775 B. Blurred Lines, Nonstate Actors, and Hybridization 777 CONCLUSION 780 INTRODUCTION

The concept of an apolitical corporation is Utopian. Boards of directors cannot serve the best interests of corporations through political blindness. In the contemporary environment, companies proactively influence the shape of regulation through an array of mechanisms to benefit their interests. (1) They also react to political and regulatory developments, selectively taking public stances on voting restrictions, racial justice, anti-Semitism, gender equity, human rights, climate change, reproductive rights, and other politically charged issues. (2) The COVID-19 pandemic and societal unrest in the wake of broad social justice demands illustrate the political minefields companies must navigate. (3) The confluence of investor concern, stakeholder demands, and the recent emphasis on environmental, social, and governance (ESG) factors is pressuring companies to become more sensitive to political risk. (4) But most large public companies find the effective management of political risk elusive. (5)

Although we have no consensus definition of political risks, they are as palpable as cybersecurity, climate, human capital, and financial risks. (6) Investors, portfolio managers, insurers, lenders, and ratings agencies regularly incorporate data related to political risk into their decision-making processes. (7) Political risk exposures raise the cost of capital and premiums for corporations perceived as riskier. (8) Historically, political risks focused on transnational risks, including trade wars, military conflict, and terrorism in developing or emerging markets that could impact corporate investment and market valuation. (9) Recently, domestic political risks related to COVID-19, populism, racial unrest, and a potential new era of enhanced state intervention have grabbed the attention of boards, investors, and other stakeholders. Whereas mainstream investors are more likely to evaluate political risk data associated with their portfolio investments, company approaches at the enterprise level are generally reactive, less sophisticated, and more ad hoc. (10)

Corporate political engagement intersects with the longstanding corporate-purpose debate. A leading critique of stakeholder governance, or an argument in favor of shareholder primacy, is the concern that it provides managers cover to pursue their own political and other self-interested prerogatives in their decision-making, thereby making companies plutocracies in disguise. (11) Not surprisingly, some observers are reluctant to mix business and politics. Despite important democratic-legitimacy concerns beyond the scope of this Article, modern corporations, specifically corporate boards, must inevitably engage with and manage political risk in their strategic oversight role. (12) Contrary to what some contemporary observers may think, political demands on the corporation are neither new nor likely to disappear. (13) Board failure to adequately oversee political risk, even when it evades legal liability, can have serious negative implications for corporate strategy and value. (14) A company's response to political risk depends on context, and designing political risk-management capabilities at the enterprise level demands a coordinated, proactive, strategic approach. (15) ERM is a dynamic internal-governance mechanism through which firms can address political risk, among other key business risks. Effective board oversight of ERM has the potential to help firms navigate complex political minefields and capture business opportunities. As part of the corporate immune system, ERM complements external corporate governance mechanisms: shareholder empowerment, markets, litigation, gatekeepers, insurance, public sentiment, and top-down public regulation. (16) It also performs an internal regulatory function that lowers monitoring costs for government regulators. (17) This Article adds to the legal literature in three ways. First, it situates political risk within the contemporary ERM discussion. (18) Second, it reexamines how corporations engage with politics in the contemporary context. (19) Finally, it contributes to theories that posit the large modern corporation as a quasi-public institution and argues, with some caveats, that it functions as a quasi-political institution, mandating more robust board oversight of political risks.

Part I explores past and present corporate political engagement. Part II examines political risk as an element of ERM. Part III establishes the link between corporate legal doctrine, oversight, risk management, and political risk. Part IV analyzes proactive political engagement and reactive responses to political pressures. Part V discusses the connection between politicization, political risk, and corporate purpose. The Article concludes by detailing the implications of political risk management for contemporary boards.

  1. CORPORATE POLITICAL ENGAGEMENT, PAST AND PRESENT

    1. Corporate Political History

      Since the beginning of the United States, corporations have been embroiled in politics, controversy, and public mistrust. (20) The impetus behind the enactment of general corporation statutes, at least in part, was the concern that corporate chartering by special acts of state legislatures was a tainted process involving cronyism and lobbying. (21) State general corporation acts were considered an innovation that democratized the chartering process and removed unnecessary political influence by powerful interests. (22) Since the beginning of the twentieth century, corporate political activity has been subject to federal regulation, especially restrictions on campaign contributions. (23)

      Historically, corporations have experienced periods of public hostility. (24) Nonshareholder interest groups have generally followed two approaches to influence corporate behavior: (1) working indirectly through federal and state governments and (2) directly pressuring corporations. (25) The direct approach became prominent with the civil rights and antiwar movements. (26) The 1970s witnessed Ralph Nader and other consumer advocates employing shareholder resolutions as one means, among others, to directly influence corporate policies. (27) In a watershed moment in corporate history, the Project on Corporate Responsibility, a group of young lawyers backed by Nader, campaigned through a range of shareholder proposals to make General Motors more socially responsive to environmental, health, safety, and other concerns. (28) A contemporary academic observer stated: "As the result of the search for a more vulnerable target, the corporation, rather than the political structure, has increasingly become the recipient of the political goals and pressures of various youth, anti-war, anti-pollution, anti-racist and consumer-oriented organizations." (29) Activists sought to use major corporations as a forum; as Nader said, "G.M. may be the host for a great public debate on the role of this giant corporation in American society rather than a wooden recital of aggregate financial data." (30)

    2. The Contemporary Moment

      In contemporary society, stakeholder and political demands upon corporations are multifaceted, direct, indirect, and fast moving due to social media and technological innovation. (31) All of society's institutions and their activities have come under increased scrutiny, especially corporations' role in, and accountability for, economic and social outcomes. (32) Dissatisfaction with political gridlock and failures, in part, make corporate engagement a pragmatic tool among a range of mechanisms available to activists. (33) Are we experiencing a new, defining contemporary moment? History suggests not, yet the COVID-19 pandemic has elevated the importance of political risk for corporate boards and arguably changed the way companies operate.

      Contemporary observers are resurrecting and repackaging previous reform efforts as well as engaging in novel...

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