Public Companies and Politics: How to Co-Exist
January 17, 2023
A number of U.S. public companies have recently found themselves in a surprising place: trapped in visible and charged debates with politicians over internal corporate and investment policies.
And when those policies strike different chords across the political spectrum, it increasingly brings boards of directors into new realms of controversy. Can this trap be avoided or has corporate policy forever become entangled in a continuation of politics by other means? Will public companies be forced to declare red or blue allegiances to match the polarized political environment of red and blue states? And will investors follow suit?
For companies that want to keep away from both the political debate and the allegiance question, the path is challenging but should start with fiduciary duty basics: develop policies under a clearly articulable rationale that enhances shareholder value. Doing so removes the central argument cited by some observers against, for example, ESG-oriented policies: that they support a cause rather than a business objective and thereby undermine the classic corporate purpose.
How Did We Get Here?
In the classic Milton Friedman view, business activities should be undertaken only if they contribute to the profits of a business within the bounds of law and ethical custom. Some well-known advocates for ESG have claimed to take the same approach, arguing that addressing material ESG issues is good business practice and essential to a company’s long-term financial performance. In the latter half of the last decade, as “stakeholder capitalism” gained traction within corporate governance circles and “corporate purpose” was discussed in broader terms, some constituencies on the left began to put pressure on companies to be the vehicles for political or social action that dysfunctional governments seemed unable to take. Over time, the underdeveloped definitions and norms embedded in those concepts, while initially embraced by activists on the left, created room for many alternative voices, including politicians on both sides of the aisle.
Where Are We Headed Next?
There are three general directions that public companies could head toward:
- First, corporate America could evolve to mirror the political landscape. In the same way that some states are known as red, blue or battleground states, so too could we find ourselves with companies actively publicizing themselves as red, blue and battleground (or “centrist”) companies that pursue management styles and policies reflective of their political imprint. In turn, customers, employees, investors and others could decide which companies to deal with based on their own political allegiances.
- Second, companies could attempt to adhere to the classical Friedman doctrine and refuse to take stances on any political or social issues that do not directly impact their businesses. The appeal of this approach is readily apparent, and it may even work for some companies over certain periods of time. But the shape of today’s political and social discourse frequently leaves a lot of room to argue that facially neutral policies have societal or political implications, and many investors (particularly younger ones) have been increasingly focused on these implications in the past several years.
- Third, and we think more tenable over the long run, is a return to the basics of fiduciary duties in a way that is also responsive to the current realities. The Friedman doctrine that companies should pursue profit and leave political and social issues to governments can be a starting point, but the practical director or executive will also be sensitive to the wishes of their customers, employees and business partners. If a company sells a product to a customer base that has demonstrated strong views on a particular issue and whose purchasing habits will be affected by corporate policies, then even Milton Friedman would say that the company should shape its corporate policies accordingly and make this clear to all affected parties.
While this third approach is far from guaranteed to spare companies from political backlash, it remains the most promising way forward in exceedingly difficult terrain. And companies that prepare for these situations—and carefully articulate the rationale of any decisions in advance—will have the highest chances of avoiding the worst of the resulting political and marketplace fallout.
Some encouragement can be drawn from the past. Today’s corporate and political landscape has many novel features, but the fundamental contours of public companies as political citizens are not unfamiliar. Many legislative and regulatory requirements, for example, have a political or social aspect that are outside companies’ core competencies. Think about Foreign Corrupt Practices Act compliance, conflict minerals disclosure, pay-versus-performance disclosure and, more recently, proposals for mandatory climate-related disclosure—all of which require companies to develop an expertise that has some political valence while still maintaining their competitive position in the marketplace. These are the experiences that companies should draw on when navigating today’s world.
During periods of relative calm there are steps companies can take to better position themselves if and when the storm of political or social issues arrives. The ultimate goal in these circumstances is to ground the company’s response in its longstanding business fundamentals and bona fide business objectives.
Perform an Assessment
Boards and executives should start by taking stock of the company’s core constituencies and surrounding context. Are the company’s most important customers concentrated in a particular region or social group? Do they trend toward any political positions that are relevant to the business? The same questions should be asked of the company’s employees, suppliers, customers, investor base and other important business partners. The answers should be used to answer one question: what is in the best long-term interests of the company?
It is also advisable to think carefully about the company’s context, industry and peers. Certain issues might be more salient to an oil and gas company than to a financial institution and vice versa. Companies possessing a unique relationship with any politicians (or any local political constituencies) should give special consideration to how that relationship should play a role in their actions. Boards and executives should also take another look at the company’s historical record so that it can be readily drawn on in a crunch. Nuanced familiarity with the company’s reputation in the marketplace and in the public square will help corporate leaders understand the outer limits of possible responses and build upon the company’s existing goodwill.
The results of this assessment will empower boards and executives to focus on potential areas of risk bespoke to the company.
We suggest consolidating the results of the assessment phase into a set of guidelines or principles that the company can leverage going forward. The guidelines should lay out the business priorities fundamental to the company’s continued success in enough detail to be useful, while still permitting flexibility for new circumstances. For example, does the company have an established track record with respect to certain risks or opportunities that are specific to the company? What steps must be taken (or avoided) in order to ensure the protection of the company’s customer base, brand or other important assets?
In the current environment, public companies must be conscious of politics as they think about increasing profits. We suggest:
- Justifying each decision by its contribution to the long term success and health of the business; and
- Communicating the profit rationale clearly to the public, and thereby creating an objective basis for each corporate action, potentially avoiding political scrutiny.
This approach gives companies the flexibility to carry out the sustainable activities that are most important to their constituencies. A good set of internal guidelines will help companies to identify these activities. While companies can no longer avoid facing political issues, in this way the Friedman doctrine lives on: focusing on the success of the business remains the best way for companies to convince their critics that they take their social responsibility seriously.
 For example, BlackRock has drawn scrutiny from politicians both on the left and the right. The New York City Comptroller sent the firm a letter urging it to push its portfolio companies to reduce their carbon emissions, while Republican-led states have withdrawn more than $1 billion in assets under management in protest of the firm’s green investing policies. Disney has also recently drawn retaliation from the State of Florida for its opposition to Florida’s so-called “don’t say gay” law, which recently resulted in a books and records demand from a shareholder. Further, Citigroup and Amazon have become the targets of a bill proposed by Senator Marco Rubio in response to their commitments to pay travel costs for their employees to access abortion services.
 Milton Friedman, “The Social Responsibility Of Business Is to Increase Its Profits,” N.Y. Times Magazine (Sept. 13, 1970), available here.
 See, e.g., State Street Global Advisors, CEO’s Letter on 2020 Proxy Voting Agenda, available here (arguing that ESG is “a matter of value, not values”).
 See, e.g., Cleary Gottlieb Steen & Hamilton LLP, “The Purposes of a Corporation and the Role of the Board,” available here. As we stated in that article, we reiterate here that we do not use the term “dysfunction” as an aspersion on any political party or philosophy, by rather to describe a generalized inability of elected officials of all philosophies to engage in consistent dialogue and compromise that leads to the passage of thoughtful legislations designed to address the many existing issues faced by the country.