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March 23, 2012

Corporate Governance Advocates Take on Political Spending and Contracts with Managers
    by Robert Kropp

The International Corporate Governance Network publishes a statement on corporate political spending and a model mandate for contracts between asset owners and managers.

SocialFunds.com -- In September, the International Corporate Governance Network (ICGN), an organization of institutional investors representing $18 trillion in assets under management, submitted a letter to the Securities and Exchange Commission (SEC), voicing its support for a petition urging the Commission "to develop rules to require public companies to disclose to shareholders the use of corporate resources for political activities."

Calling for "a rulemaking project to require disclosure of corporate political spending to public company shareholders," ICGN stated in its letter, "While best practices are important, this is not a substitute for disclosure, because absent disclosure investors would not know whether companies are following these practices."

ICGN also stated in its letter that it planned to publish guidance for investors on corporate political lobbying and donations. This week, with the 2012 proxy season underway and no fewer than 47 resolutions requesting that companies disclose their political expenditures as well as payments to trade associations, the organization has published a Statement and Guidance on Political Lobbying and Donations.

The resolutions requesting disclosure are based on a model developed by the Center for Political Accountability (CPA), which announced this week that the number of corporations agreeing to voluntarily disclose their political spending activities has reached 100. According to CPA, 52 of the companies are listed in the S&P 100, and 94 are in the S&P 500.

ICGN's 20-page statement is unequivocal in its position that corporate transparency is essential. "Corporations involved with political activities should develop a robust policy and procedures framework that is publicly transparent and overseen by the Board," it states. "The ICGN also advocates shareholder votes on a company's political lobbying policy and its budget for political donations."

The statement articulates the relevance of the issue for investors. On a macroeconomic level, "concentrations of political influence can create distortions that can impair not only civil society, but also the efficient operation of markets and the interests of investors." At the firm level, analyses of corporate political spending have found a correlation between the activity and a negative effect on firm financial performance. Furthermore, as ICGN points out, "The risk of inappropriate activity can create reputational risks with unintended consequences for the company and its investors."

"In 2010, Target Corporation experienced such risks directly after it received unwanted attention, consumer boycotts, and protests for its support of a controversial candidate," states a shareowner resolution filed at the company this year by Green Century Capital Management.

ICGN's guidance for corporate policy frameworks on the issue include ensuring that they are based on codes of conduct reflecting corporate approaches to business ethics, and committing to public disclosure of lobbying and indirect expenditures to trade associations and political action committees (PACs).

Compliance with policies should include internal controls and reporting processes to monitor compliance, and corporate boards of directors should be responsible for approving policies and ensuring that lobbying and political spending "do not reflect narrow political preferences of the company's executives."

An example of such "narrow political preferences" occurred during the 2010 elections in the US, when News Corp. and Rupert Murdoch contributed a million dollars or more to both the US Chamber of Commerce and the Republican Governors Association (RGA). RGA reportedly spent at least $5 million to help elect John Kasich, a former Fox News commentator, to the governorship of Ohio. Murdoch publicly stated that the contributions were the result of his personal friendship with Kasich.

Political spending was not the only governance issue taken up by ICGN this week. In its model contract terms between asset owners and their fund managers, it states, "As long-term owners which are exposed across asset classes, major institutional investors need to be aware of systemic risks to the value of their overall portfolio." Environmental, social, and corporate governance (ESG) factors may be difficult to quantify, ICGN observes, but they can have significant financial impacts.

In 2009, the (Fiduciary II) of the Asset Management Working Group (AMWG) of the United Nations Environment Program Finance Initiative (UNEP FI) stated, "ESG issues should be embedded in the legal contract between asset owners and asset managers, with the implementation of this framework being governed by trustees via client reporting." Otherwise, the report warned, managers face "a very real risk that they will be sued for negligence."

In order to ensure the inclusion of long-term considerations into investment decision-making, ICGN recommends that the integration and monitoring of ESG factors be included in contractual agreements, as well as processes for due diligence to determine that ESG factors are indeed being practiced. The stewardship responsibilities of asset managers should also ensure that asset owners can direct or otherwise establish guidelines for proxy voting by managers on their behalf.

ICGN's model mandate concludes with a lengthy exhibit of model contract terms. Acknowledging that its document seeks to supplement such existing guidelines as those of the United Nations' Principles for Responsible Investment (PRI), the organization "recognizes that there remains much more work to be done," and welcomes "further input as best practice evolves."

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