Political spending: big risk for boards: directors' responsibility for protecting companies must embrace meaningful oversight of direct and indirect political spending.

• Author: Freed, Bruce F.
• Position: DUTIES OF DIRECTORS

THE ROLE OF CORPORATIONS in politics has changed dramatically. From the passage of the Tillman Act in 1907 to the Supreme Court's decision in 2010 in Citizens United, corporations played a limited role in the financing of federal elections. Corporations were prohibited from using corporate treasuries to make any contribution or expenditure in connection with a federal election. They had to use funds voluntarily contributed by employees and stockholders to a political action committee to make a contribution or expenditure in a federal election. All activity by the political action committee had to be fully disclosed to the Federal Election Commission.

All this was altered by Citizens United that freed corporations to spend unlimited funds directly or indirectly through outside organizations in federal elections. These funds would not have to be disclosed to the public or even to shareholders. Not unexpectedly, the change in the law led to an unprecedented infusion of hundreds of millions of secret money into the Presidential and Congressional campaigns in 2012. There is no reason to believe that coming elections will see a slowdown.

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Business did not seek this change nor do all businesses welcome it. For many highly regulated businesses there is real risk that powerful political interests may apply pressure to contribute. Many companies fear that they lose competitive advantage to their rivals who see opportunity in making large undisclosed contributions to well-connected political organizations. All of this places new responsibilities on directors to oversee their company's political spending much more carefully and ensure that any spending is done in a manner that does not expose the company to risk and is consistent with the company's public values.

Profound threat

Today, the risks are becoming increasingly apparent. The use of 501c4s, Super PACs, and trade associations to hide political spending is spreading and represents a profound threat to our democratic system and to companies themselves. There are growing reputational, business and legal dangers that directors and companies must be aware of and be careful to avoid. Directors will also face personal ethical and legal challenges as their companies make decisions whether and how to participate in this newly reshaped arena.

But as there has been a shift in law, so too has there been a change in the attitude and approach toward companies'...