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How A Framework For Corporate Political Responsibility Can Enhance Business Social And Environmental Sustainability

How A Framework For Corporate Political Responsibility Can Enhance Business Social And Environmental Sustainability

by ESG Business Institute -
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As companies face increasing public and internal calls for action on environmental and societal crises, more corporate leaders are launching or expanding practices to enhance their impact and chart a path for long-term business success. But their words and actions sometimes don’t align with their political contributions and lobbying efforts, an issue that came under the spotlight in the wake of the divisive 2020 election and Jan. 6 Capitol attacks.

One backdrop for this corporate discord is the current era of ever-growing corporate political spending, which continues to set records in the wake of the U.S. Supreme Court’s Citizens United ruling, and a pay-to-play system where high-dollar donors influence policy decisions that may benefit their bottom line but harm the planet or society at large. Amid the ever-widening gap between the ultrawealthy and frontline workers who lag in income levels and well-being, more people are looking to work for and do business with companies that share their values — and some corporate leaders are looking for new ways to align their political influence approaches and actions with their company’s values and commitment to stakeholders, including the environment, workers, and customers. Another key element of the context are new questions and concerns about whether business has a legitimate basis for engaging on any given issue — through spending, public statements, lobbying and so on.

To provide a framework for those companies ready to align their words and actions with planetary and societal sustainability and uphold their stakeholder commitments, the Corporate Political Responsibility Taskforce at the University of Michigan’s Erb Institute is announcing the Erb Principles for Corporate Political Responsibility. To learn more about the principles and the taskforce’s future plans to build on them with corporate leaders and others in the business community, I recently spoke with Taskforce Director Elizabeth Doty as part of my research on purpose-driven business. Following that interview, I also gathered written input from Erb Institute Faculty Director, Tom Lyon.

Christopher Marquis: How did this set of principles came about? How are you launching them publicly?

Elizabeth Doty: The Erb Principles for CPR are the first output of the Institute’s Corporate Political Responsibility Taskforce or “CPRT.” We convened the taskforce amidst the crises in early 2021 with two goals: to help companies better align their approach to political influence with their purpose, values and commitments and to help establish CPR as a shared norm. So, for the past 14 months, a group of executives in government affairs, sustainability, DEI, communications, and board governance roles have been working to distill this common set of principles for corporate political responsibility, with help from a broad network of stakeholders and experts.

Tom Lyon: The basic idea of corporate political responsibility is that companies not only need to align their words and actions with their commitments, but that they also have a shared interest and a responsibility to support the larger systems on which we all depend. In practice, CPR may mean different policy positions and priorities than a company has adopted in the past, or it may mean refraining from getting involved in the first place.

Marquis: If a CEO had never really heard of this work and you wanted to convey why this is important to them what would you say? Basically, what’s your elevator pitch?

Doty: The key proposition is that companies need a non-partisan, principled thought process to weigh whether and how to engage in civic and political affairs. With trust in civic institutions continuing to decline, expectations for business keep rising, and acting on these expectations is easier said than done. In the face of new pressures and new questions from employees, investors, customers and now lawmakers, leaders are asking themselves: Should we engage on this issue? If we do get involved, how do we do so responsibly?

Clearly, companies will not and should not weigh in on every issue. They need to be responsible with the use of their incredible power and influence. So, we outline a thought process based on four questions:

● Legitimacy: On what basis do we authentically engage in civic or political affairs?

● Accountability: Are our political activities aligned with our values, purpose, and commitments to all stakeholders?

● Responsibility: Do our political activities support the systems on which markets, society and life depend?

● Transparency: Do we communicate openly about our political activities to relevant stakeholders and to promote public trust?

As you can see, the process does not prescribe specific policy positions but helps companies be responsible in ways that are specific to them. That said, the Principles are not agnostic about American constitutional democracy, competitive markets, informed civil discourse, or avoiding harm. These are areas that companies feel they can stand on and appeal to the concerns of many, many American citizens.

Lyon: The focus on foundational systems is incredibly important. We debate how to solve problems and create opportunities for people, planet and profit, but we often lose sight of the role of market rules, civic institutions, and civil discourse in shaping whether that actually happens. For example, with the wrong market rules, you can have monopolies or externalities like pollution, which mean earning a profit isn’t actually creating value for society. This is a tenet from classical economics, but it also seems to be an area of common ground for many Americans.

The biggest distinguishing factors for the principles? The first is that they are pragmatic and workable. Second, they take a “third side” view. This is where the CPRT process worked well. We wrestled with different views, and gradually found a thought process based on common ground, knowing we will still debate specific issues. Third, they always include action. And finally, they approach CPR as a journey. This is difficult territory involving judgment and learning over time. It’s taken a long time to get here, and it will take a long time to get back to that trust and to systemic solutions. The Principles can provide the focal point for more constructive dialogue.

Marquis: What companies are supporting the principles with the taskforce? Any examples of how they’re making changes to align with them?

Doty: First, we should distinguish between formally declaring support for the Erb Principles and taking actions to improve CPR. Many companies have been taking action on their own or with coalitions, or applying political responsibility to specific issues. Still others are making changes internally without yet going public. That said, we think the time is right for more companies to be explicit about their commitments to political responsibility, and the Principles provide a way to do that.

So, thus far, five companies have publicly stepped forward as supporters of the Erb Principles for CPR. We are immensely proud to announce IBM, Pirelli Tire North America, Danone North America, Aspen Skiing and DSM North America as inaugural supporters, who have taken a critical step in helping to establish CPR as a shared norm. As I mentioned, each supporter commits to adopt one of three concrete actions over the next 12 months.

Pirelli Tire North America and Aspen Skiing are working with the Center for Political Accountability to be ready to adopt the new CPA-Zicklin Model Code of Conduct for Political Spending. This will require disclosing and overseeing any election-related spending, reviewing candidate positions and spending through trade associations, and ensuring full transparency on the use of trade association dues.

IBM is now using the Legitimacy principle to weigh whether to get involved in specific issues, and finding it useful in framing conversations with stakeholders and articulating their reasoning with respect for stakeholder concerns. In addition, IBM is one of 22 S&P 500 companies that have prohibited political spending, according to the Center for Political Accountability. They argue that focusing on “policy, not politics” pushes them to advocate based on the quality of their ideas, reduces reputational risks and pressure to contribute, and avoids emerging concerns about the use of shareholder funds for political purposes. Interestingly, the number of S&P 500 companies prohibiting spending has increased from 10 to 20 since 2018.

Finally, based on its adoption of the Erb Principles, DSM North America has committed to review the policy positions of its trade associations to ensure alignment with its mission, purpose and values, and to exit if the trade groups are not willing to change their positions.

Marquis: How can individuals help push this forward? Can they demand that companies they work for or buy from are politically responsible?

Lyon: Companies are listening to their employees and more employees are speaking up. One of the most effective strategies is just asking the question, on what basis is my organization engaging? Is this a legitimate use of our voice and authority? How are we weighing tradeoffs? How are we deciding whether to support the Inflation Reduction Act? How are we weighing a candidate’s record on respect for rule of law versus their committee positions that might benefit our industry? Those sorts of questions are surfacing important conversations at the senior levels, and employee resource groups are one forum for thinking them through. That said, companies need to be sure they are listening to employees who are not as vocal and recognize that there are limits to what employees are willing to discuss in the workplace.

Also, investors should be careful in voting proxies and look at those related to disclosure of political spending or guidance on political influence. Interestingly, decisions such as Citizens United assumed that shareholders would have that information.

Marquis: In my work with students, I’ve noticed that younger people tend to be more demanding of companies, speaking out when they see them tilt the playing field in ways that advantage them and pass costs on to society. They also want companies CEOs to fight for social justice and environmental issues. How does the framework align with younger people’s engagement and increasing expectation of companies?

Doty: Younger employees are a really incredible channel for more systems thinking inside companies, because they’re bringing in their viewpoints as citizens and those who will inherit the longer term. Also, culturally, they don’t see as much separation between their work identities and their personal lives. In a talent-constrained world, this is getting attention from company decision-makers. We can view these perspectives as a way to keep ourselves honest, to challenge our assumptions, and perhaps as a valuable source of a more systemic view.

That said, many younger folks I talk with push companies to get involved on societal issues, because they view them as the most powerful voice. We debate this all the time. There is a risk of a dangerous precedent, of using corporate power for any preferred cause. Companies have a structural advantage in resources and ability compared to consumer and citizen advocacy efforts. Do you want that used for any cause that becomes popular, even if it’s one you disagree with? Those are some of the concerns we are hearing now about companies getting involved beyond their purview.

Lyon: On the other hand, it may be necessary in our current situation to push companies to be more proactive on issues like climate change. That’s one reason we apply more nuanced principles. We do think that companies have three bases for engaging, and one of them is Consequence; issues like political stability, democracy, and a stable climate that are of such consequence that it is a basic matter of citizenship to weigh in. Then there are commitments you’ve made. Your purpose and values, or even your business strategy, which were the reason why people decided to work for you or invest in or buy from you. So at IBM, inclusion, social justice and racial equity have been commitments since the ’60s. And that is a basis for getting involved in some issues now. And finally, the last reason is Contribution, or the areas where your company has the most impact. So, Patagonia is another example, with its apparel and organic cotton farming, and its decision to apply its political influence there most importantly, because that’s where they have the most outbound impact.

Marquis: Looking globally, are there examples or lessons that U.S. businesses could pull from companies in other countries?

Doty: In the rest of the world there is a norm of not enabling or not allowing political spending from corporate treasuries. That it is just such a conflict of interest, for an economic entity to influence economic rules. I’ve had senior executives from global companies laugh when I discuss CPR because corporate political influence is not even legal in most places. On the other hand, there’s a lot more disclosure in the U.S., especially around PAC spending and things like that, that is not the norm in other countries.

The World Benchmarking Alliance just came out with its updated social indicators. It basically sets non-spending as a benchmark for around the world, and then alignment of spending is the second criteria. I think it’s a start.

Marquis: During many of my presentations, I include the Business Roundtable and how this group of large companies are signaling that stakeholders are important. But recently a series of studies have shown that Business Roundtable companies actually do worse on environmental outcomes. They have worse environmental infractions. They have worse labor outcomes. During a recent presentation, someone raised their hand and asked, “Do you know that they lobbied for Trump’s tax cuts and against the Inflation Reduction Act?” And I said, “Yes, that’s actually what my next slide shows.” It is so disappointing how companies and groups like this talk in one way yet lobby in another. How do you think about this?

Doty: One of the most powerful ways to think about the times we’re in is that the Business Roundtable is attempting to craft or articulate an emerging new social contract. That these are our obligations in a general way. Each of our companies are different, but in general we have acknowledged these obligations as part of a social contract. Now others are challenging that contract, pushing back on balancing shareholders and stakeholders. But neither one addresses the question of responsible corporate political influence. This critical, because it affects democracy and representation, as well as the market rules that drive economic outcomes.

So what we’re exploring is, what would be the elements of responsible engagement? Where does business legitimately engage in influencing policy? And where is it illegitimate? So, for example, lobbying for tax cuts at the expense of policies around climate, plastic waste or economic opportunity. Implementing barriers to trade, and protecting subsidies that enable pollution. These may benefit your business, and there is room for debate, but there are definitely ways to use your influence to tilt the playing field against the premise of free markets. One of our foundational premises is that you will help enable markets to serve their purpose, which was the whole point of the invisible hand idea — to serve and create value for society — so that you’re hurting stakeholders from the get-go if you’re not doing that.

In practice, this is not so easy, in our current environment. An article by Lee Drutman describes two trends over the last 40 years: of the ever-escalating influence of business in state capitals and in Washington over who gets elected, what positions they get in government, and then policies. So there is this increasing influence, but also a narrowing of the basis for influence, which that Mark Mizruchi wrote about in The Fracturing of the American Corporate Elite. It’s become normalized for influence to more legitimate to have it be based on tax benefits or subsidies or minor rule changes for your company or industry, and less about the overall health of the economy. So those two trends have made short-term special interest seeking it very just become the norm for most companies. And now it has become what you have to do. So companies, in a way, are stuck, having set a precedent, and it’s hard to unwind. They are feeling more of a shakedown from politicians with their hands out than a special advantage at this point, and what they don’t remember is it hasn’t always been this way, and we could change it.

This is one place where the long-term and short-term conflict, and responsible leaders will look for rules that healthy competitive markets that reward real value for society. Companies are also increasingly going to be held accountable for alignment in our current environment, which constantly sets them up for hypocrisy traps, and where it’s really hard to pursue your interests and play the game the way it’s played federally or at the state level. Companies are asking how they can realistically engage and be aligned with what they say the’re committed to with their stakeholders. In fact, more shareholder resolutions are pushing for alignment, which is very very difficult in the current environment One way out is to start to work on those underlying foundations that make the whole system work better, like less emphasis on paying for access and more emphasis on good ideas and things that help elected officials serve their constituents. Not easy or without friction, but definitely a better way to engage.

We think companies are starting to see that option. They need to help the fundamental systems work better to get out of the hypocrisy traps for themselves, and drive growth and opportunity for society. Beyond market rules, companies have an interest in a well-functioning constitutional democracy, where citizens trust that their institutions represent their interests. Companies have influence on that. Companies depend on effective civil discourse and an informed public, and they have an influence on that. So those are some of the leverage points companies can consider, to see if what they’re doing is strengthening these systems or corroding them. By working to strengthen those, they will be aligning incentives with real value for the long term, which has an enormous impact on the the environment.