David Tozer, assistant head of research at EIRIS, argues that investors have neglected companies' political lobbying practices for too long.

Political lobbying remains a controversial area. Across the world, large companies give considerable amounts to political parties, and powerful lobbying industries have emerged. In the EU, around 15,000 lobbyists are based in Brussels – roughly one for every member of staff at the European Commission.
Political lobbying prompts different types of criticism. Some shareholders have disagreed with the policies of the political parties to which money is donated. Others may feel companies should not make political donations unless expressly agreed to by a majority of shareholders. More fundamentally, some may regard donations from companies as a corrupting influence on the political process.
The South African King II Code (2002) remarked that "the 'company' remains a key component of modern society. In fact, in many respects, companies have become a more immediate presence to many citizens and modern democracies than either governments or other organs of civil society". This still rings true as we witness the state withdrawing from various activities, either through privatisation or outsourcing, or abandoning such activities altogether as austerity policies widely tighten their grip.

Consequently, much more of everyday life is serviced or dominated by corporate power and practices, which makes it all the more critical for investors to play their part in monitoring and challenging the manner in which companies are going about their businesses. The 2012 US election campaign revealed that UK companies were among the most significant donors following the notorious Citizens United v. FEC 2010 Supreme Court ruling, with 14 of the top 50 foreign controlled US Political Action Committees (PACs) having parent companies listed in London, including HSBC, GlaxoSmithKline, Shell and BAE Systems. In some cases, companies do this despite declaring in their annual reports that they do not make political donations. US regulations allow them to keep these activities at arm's length through PACs.
The fact corporations are willing to spend such large sums either directly or indirectly in the hope, if not expectation, that the elected winners will help advance their corporate agenda is a concern. However, political donations in the US or elsewhere may only be the tip of the lobbying iceberg. While EIRIS has found that many companies claim in their codes of corporate conduct that they do not provide political donations, the art of seeking political influence can be pursued by many other avenues such as supporting industry or trade bodies, providing sponsorships to political conferences or initiatives, achieving appointments on government bodies or funding policy think tanks.
While some of these practices may be regarded as a legitimate part of a democratic process, businesses have been able to deploy their resources to fund lobbyists and gain access to the political corridors, while other parts of civil society struggle to have their voices heard. The democratic and accountable functioning of society is arguably at risk when access to decision makers and the policy making process is heavily skewed in favour of narrow corporate interests. The revelations around the Murdoch empire's links with the UK government in the expectation of a favourable outcome with its bid to takeover BSkyB dramatically illustrate ways in which this can work.
Corporations risk being caught in the headlights of publicity when spending money on donations, lobbying and PR campaigns in an effort to gain influence when they can also be exposed for pursuing strategies to avoid, or at least to minimise, tax payments as evidenced by recent controversies surrounding Starbucks, Google, eBay and others. In the UK, it has been reported that 30 companies with more than 3,000 subsidiaries located in tax havens have been pushing the Treasury to water down anti-tax haven rules being introduced in the Controlled Foreign Companies rules at the start of 2013. Shouldn't such companies be disclosing that they are engaged in such lobbying?
How can investors assess the costs and benefits of companies adopting particular public positions or supporting campaigns? Investors need to develop a range of tools and ask key questions to better understand the intent and financial impact of such activities. For example, do companies have a policy or code on which corporate lobbying practices are acceptable or unacceptable to guide staff? Does any kind of framework exist to provide some form of strategic approach? Are corporate headquarters really aware of the full extent of lobbying activities that occur in its name, wherever they operate in the world?
To help build trust, there is a need for greater transparency from major companies on their lobbying activities, along with a means of auditing lobbying activities to make it robust. This should include details of membership or appointments to various bodies, along with all donations to political parties, campaigns, US PACs, industry bodies, corporate roundtables and think tanks. Some form of shareholder scrutiny and approval should also follow.

The Global Reporting Initiative G3 Sustainability Reporting Guidelines introduced social performance indicators around a company's public policy initiatives several years ago, but the take-up of these by companies in any meaningful way has been rare. Of course, some companies, even though they have personnel dedicated to government relations, might find all this rather uncomfortable. However, the introduction of independent auditing frameworks could help to legitimise responsible lobbying. There is an opportunity for bodies such as the UN Global Compact, GRI, AccountAbility and others to provide such a framework. The International Corporate Governance Network has recently produced some guidelines on political lobbying and donations.
Political lobbying is arguably an area that has been neglected for too long by investors. A greater focus needs to be given to looking at the (in)consistencies between lobbying positions, CSR policies, sustainability targets, the strategic direction of a company and the risks involved. Insights gained might not only improve the transparency of the corporate contribution to society but also support the long-term value of responsible investments.
David Tozer is assistant head of research at EIRIS