Political engagement is the new frontier for corporate fiduciary duties

Companies and funds can wade into polarizing debates, but only if they do it right

Political engagement is the new frontier for corporate fiduciary duties
Edward Waitzer

Corporations and investment managers control resources and engage with stakeholders in ways that allow them to coordinate and amplify views on controversial political issues. Doing so, however, can pose several concerns.

For one, such advocacy can generate adverse market reactions. Bud Light has long associated its brand with the LGBTQ+ movement, but the conservative boycott in response to a promotional campaign with a transgender influencer caused sales to fall 17 percent. Anheuser-Busch InBev SA’s stock price dropped by 20 percent and has yet to recover fully.

Another risk is that corporate or fund manager leaders will use their position to advance personal views or ambitions at the expense of their employer.

This raises the broader question of whether and how corporations or investment fiduciaries should engage in political advocacy. Some argue that this offends their purpose and can only serve to polarize rather than inform partisan divides. Such arguments are hard to maintain in a world where most issues have (or can easily become) political, and politics have become a product feature.

Others focus more narrowly on the risks of political “posturing,” noting that corporate or fund manager commitments are often opportunistic and amount to little more than meaningless buzzwords and ideological virtue signalling. Taking a public political stance but failing to back it with conduct can give rise to legal liability and cause reputational damage to the corporation or investment manager and the causes it purports to support.

The legal issues have moved front and centre in the US. In an environment of dysfunctional political governance, the risk of backlash is acute and corporate and investment manager actions are as likely to polarize as enlighten. US corporate law, which arguably continues to focus director duties more narrowly on the financial interests of shareholders, can contribute to the discord. Likewise, several state attorney-generals have recently taken politically motivated (if legally tenuous) positions on asset managers' duties.

Canadian directors and investment fiduciaries have a clearer legal mandate to focus on (and mediate) the interests of corporate stakeholders (including shareholders) or beneficiaries (present and future). Notwithstanding the risk of public outrage, few would dispute that directors and investment fiduciaries can fulfill their duties by actively engaging in issues significant to the corporation or the interests of fund beneficiaries. The key to managing legal and political risk is doing so with integrity.

Boards should have clear internal procedures for overseeing political engagement and social commitments. This imposes some discipline on the temptation to jump on a political bandwagon, reduces the risk of such activity being personally motivated and creates a record to support a board’s exercise of business judgment. Such a record proved key to defending Disney’s decision to oppose Florida’s Parental Rights Plan as a business decision.

Board oversight should focus on ensuring that a response to any highly visible public issue is justified in relation to the enterprise’s long-term commercial goals (and achievements) or the investment fund's long-term interests.

Communications that sound good but aren’t backed by actions guarantee a negative response. Consider the flurry of commitments to diversity, equity and inclusion (DEI) made a few years ago. Despite increasing employee interest and executive support, concrete goals are still elusive. By default, regulatory interventions have become the norm.

A useful precautionary measure is to be prepared to proactively disclose the extent to which actions match “talk” (the latter is often mistakenly viewed as being costless). This would be consistent with increased shareholder and investor pressure to make greater disclosures about political activity.

For example, those that back DEI should be prepared to scale up their measurement and accountability efforts if they want to retain their workforce's and other stakeholders' trust. They might further disclose how much their charitable and political spending is consistent with public statements. Finally, they should be prepared to disclose the process behind their political engagement – how it is overseen and the basis for the positions taken.

In the rush to respond to controversial issues, decision-making often overlooks the risk that inauthentic or insincere statements will ring false for everyone, even those who agree with them. On the other hand, institutions that can speak to longstanding “core values” can endure their harshest critics – and judicial scrutiny – even on polarizing issues.

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