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

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

What are the political responsibilities of corporations? They are not to be confused with social responsibilities. Milton Friedman addressed the latter in a famous essay written half a century ago: “In a free society … there is one and only one social responsibility of business — to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.”  

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

Second, Friedman made it clear that businesses, in their pursuit of profits are to “stay within the rules of the game.” Presumably, he had in mind not just rules regarding “deception or fraud,” but more broadly, those that call for respecting property rights, honoring contracts, and avoiding negligent behavior toward employees and customers. 

So far, so good. But this leaves one crucial question unanswered: Who makes the rules? Or more specifically, who decides how broad rules like property rights and open competition apply to specific cases, such as environmental protection or railroad safety or whatever is the issue of the day? Although Friedman did not quite come out and say it, he implied a division of labor in which it is up to government to make the rules while corporations go about the business of making profits within the rules as they find them.  

That is not how things work, however, today or perhaps 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 in which the businesses themselves are often the ones who make the rules in the first place. When businesses write the rules, bad things happen. Companies can manipulate regulations to hinder their competitors. They can grant themselves tax breaks or boost their profits at the expense of public safety and the environment. Economists use terms like “rent seeking” or “state capture” but whatever we call them, these corporate behaviors erode faith in government and the democratic process. 

It would be simplistic to call for a return to a strict division of labor in which corporations mind their own business and leave the rules to government. For one thing, there has never been such an arrangement to which we could return. What is more, the right to petition the government for a redress of grievances is written in black and white into the Constitution, and that right extends to citizens in their roles as entrepreneurs 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 businesses in politics. 

Recently, the Erb Institute of the University of Michigan has released just such 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 a substantive contribution, both by clarifying the meaning of political responsibility and by providing a benchmark for determining who is acting responsibly and who is not. 

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

The Erb CPR principles have three components.  

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

Second, the CPR specifies four standards for evaluating political actions. The core standard is responsibility, defined as conformity with healthy market rules of the game. 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 disadvantage competitors. And their political participation must not subvert that responsibility to healthy competition. They are also expected to respect established science, a duty that is especially salient 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 on to the Erb principles are expected to commit to three more specific standards.

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

Next comes accountability, which means the alignment of political activities, including those undertaken through trade associations and other third parties, with the firm’s own stated commitments, purposes, and values. A company should not say one thing and quietly support another.

The final 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 do, however, include provisions to ensure that they are treated as 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 Spending, the Global Responsibility Initiative’s Standard 415 on public policy, or a publicly stated policy prohibiting the use of corporate treasury funds for election-related spending. Each of these requires the company to undertake specific, observable measures in support of CPR. 

Taken together, the declaration of principles and the specific governance 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 the campaigns of state lawmakers who promise to make it harder for competing clean energy suppliers to build transmission lines, or that a transportation company lobbies for lax safety standards that will protect it against lawsuits for negligence, or that a fast-food chain participates in regulatory rulemaking that will make it easier to block workers from moving to new jobs with competitors. These are not imaginary cases. Can they pass evaluation by the standards of responsibility, legitimacy, accountability, and transparency? If not, the companies in question can at least be called out for violating the rules of the game, not only in public, but also by their own shareholders. 

The balance between free-market capitalism and constitutional democracy is always a delicate one. The CPR principles can help harmonize the two and they allow for a much clearer dialog about companies’ participation in the democratic process. When corporations behave irresponsibly, illegitimately, unaccountably, and opaquely, then capitalism and constitutional democracy are effectively at war. Without a truce, there will be mutually assured destruction.

Source: Harvard Business Review