managemnet company strategy managemanet How — and When — Should Companies Engage in the Political Process?

How — and When — Should Companies Engage in the Political Process?

How — and When — Should Companies Engage in the Political Process? post thumbnail image

What are the political responsibilities of corporations? They will not be confused social responsibilities. Milton Friedman said the latter in a famous essay wrote half a century ago: “In a free society … there is one and only one social responsibility of business — to use its resources and carry out activities designed to increase its profits as long as it remains in the rules of the game, that is to say, engaged in open and free competition without deception or fraud.”

But what about political responsibility? What obligations do companies have when it comes to participating in the political process? The same essay provides some clues to Friedman’s thinking. First, he made it clear that the corporate leaders not to act as “legislator, executive and jurist” by using corporate resources “to prevent inflation, improve the environment, fight poverty and more.” He noted that we have “elaborate constitutional, parliamentary and judicial provisions” to regulate those functions.

Second, Friedman explained that businesses, in their pursuit of profit must “stay within the rules of the game.” Presumably, he had in mind not only rules about “fraud or fraud,” but more broadly, those that call for respect for property rights, respect for contracts, and avoidance of negligent behavior toward employees and customers.

So far so good. But this leaves an important question unanswered: Who makes the rules? Or more specifically, who decides how broad rules such as property rights and open competition apply to specific cases, such as environmental protection or rail safety or any other issue of the day? Although Friedman doesn’t come out and say it much, he implies a division of labor where it’s up to the government to make the rules while corporations go about the business of making profits within the rules as they find it.

That’s not how things work, though, now or maybe ever. Instead, we find corporations up to their elbows in the rulemaking process at every level. They contribute to the campaigns of elected officials, lobby regulatory agencies, and do what they can to influence the selection of judges. The result is a system where businesses themselves often make the rules in the first place. When businesses write the rules, bad things happen. Companies can manipulate regulations to keep out their competitors. They can give themselves tax breaks or increase their profits at the expense of public safety and the environment. Economists use terms like “rent-seeking” or “state capture” but no matter what we call them, these corporate behaviors undermine faith in government and the democratic process.

It would be simplistic to call for a return to a rigid division of labor where corporations mind their own business and defer to government rules. On the one hand, there has never been such an arrangement to which we can return. In addition, the right to petition the government for a redress of grievances is written in black and white in the Constitution, and that right extends to citizens in their roles as businessmen and corporate leaders. What we need is something more subtle than a division of labor. We need a set of principles to guide and evaluate the participation of political enterprises.

Recently, the Erb Institute at the University of Michigan released a set of Principles for Corporate Political Responsibility (CPR). They are not the first attempt to do so, but they are arguably more comprehensive than anything to date. Although they are not a silver bullet, the principles have the potential to make an important contribution, by clarifying the meaning of political responsibility and by providing a basis for determining who acts responsibly. and who is not.

The Erb CPR principles do not take sides in the debate social responsibility. They are designed to appeal equally to the staunchest Friedmanite and the most progressive advocate of corporate ESG. What they do is outline some broad guidelines for the political activities of corporations, despite their views on shareholder versus stakeholder primacy.

The Erb CPR principles have three components.

The first is a broad definition of political activities. Their definition goes beyond political spending from corporate treasuries to include lobbying, participation in creating laws and regulations, support of nonprofits, and participation in public discourse of all kinds.

Second, the CPR specifies four standards for evaluating political actions. The basic premise is RESPONSIBILITIES, defined as conforming to the healthy rules of the game market. That means companies have a responsibility to compete based on the price and quality of their own products, rather than by tweaking laws and regulations in ways that harm competitors. And their political participation should not change that responsibility to healthy competition. They are also expected to respect established science, a duty that is especially important when it comes to issues such as climate change and limiting exposure to hazardous chemicals.

As part of their overall commitment to political responsibility, corporations that sign the Erb principles are expected to commit to three more specific standards.

legitimacy means that political activities reflect the views of the company, not individual managers or officers; that they comply with relevant laws; and that they do not force employees, shareholders, or other stakeholders to take positions that they do not voluntarily endorse.

Next comes accountability, which means aligning political activities, including those carried out through trade associations and other third parties, with the company’s own stated commitments, objectives, and values. A company should not say one thing and silently support another.

The last standard is transparency, which means open and honest communication about corporate political activities, including the provision of good-faith information and expertise to all levels of government as needed to support effective policymaking.

The Erb principles do not, of course, have the force of law. They, however, include provisions to ensure that they are considered more than an empty declaration that can be signed and forgotten. For that reason, Erb requires corporations that join in supporting its principles to formally adopt one of the following three policies: the CPA-Zicklin Model Code of Conduct for Corporate Political SpendingTHE Standard 415 of the Global Responsibility Initiative in public policy, or a publicly stated policy prohibiting the use of corporate treasury funds for election-related expenditures. Each of these requires the company to take specific, observable steps to support CPR.

Together, the declaration of principles and the specific management measures that support them offer a set of objective standards against which to judge corporate political activities. Suppose, for example, that a fossil fuel company contributes to campaigns by state legislators promising to make it more difficult for competing clean energy suppliers to build transmission lines, or that a transportation company lobbied for poor safety standards that would protect it against lawsuits for. negligence, or that a fast-food chain engages in regulatory rulemaking that makes it easier to block workers from transferring to new jobs with competitors. These are not imaginary cases. Can they pass the evaluation by standards of responsibility, legitimacy, accountability, and transparency? If not, the companies in question can at least be called out for breaking the rules of the game, not only by the public, but also by their own shareholders.

The balance between free market capitalism and constitutional democracy is always delicate. The principles of CPR help harmonize the two and it allows for a more transparent dialogue about the participation of companies in the democratic process. When corporations act irresponsibly, illegitimately, unaccountably, and opaquely, then capitalism and constitutional democracy are effectively at war. Without a ceasefire, destruction is certain.

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