Study: Companies, politics don't mix

Donations found to come from worst-run firms

As a new election season begins, corporations and the executives who lead them may want to reconsider their roles as campaign donors.

A study from researchers at the University of Minnesota's Carlson School of Management suggests that the active corporate givers are often among the most poorly run companies.

There's usually little in it for shareholders when it comes to campaign contributions, and the greater the level of contributions, the more likely that management and the board of directors are not in synch about corporate goals, the study concludes.

"Taken together, our results suggest that political donations are symptomatic of (a management) problem," the authors wrote.

Many executives see political activity as a necessary component of the business world, providing access to decision makers and regulators. But the study found no evidence on average that political investments resulted in political capital.

"Who benefits from political contributions? Shareholders or management? It's management," said Felix Meschke, one of the study's three authors.

"If a company gives money to a candidate and shareholders don't benefit, then either the CEO is stupid or he's getting something else to further his own agenda, like an invitation to the Lincoln Bedroom (in the White House)," he said.

Meschke and his co-authors, Tracy Wang and Rajesh Aggarwal, said they were surprised by their findings, including the discovery that more than eight in 10 companies make no political contributions.

"For most companies, Congress just isn't that important to revenues," Aggarwal said. "In that sense, donating is a waste of money, and perhaps more importantly, a waste of time and energy by top managers, time and energy that should be spent focusing on the firm."

The Carlson study covered the campaign activities of 3,000 publicly traded companies over 14 years, through the 2004 election cycle. The researchers looked at the contributions of executives, corporate "soft money" — funds donated to political parties rather than to a specific candidate (such funds have been restricted in recent years by new campaign laws) — donations to political action committees (PACs) and donations to so-called 527 committees, a relatively new independent political platform for issue advocacy and other election activities.

Corporate-related campaign contributions for the period, in 1994 dollars, totaled $1.4 billion as recorded by the researchers. Of that amount, PAC giving ranked highest at $604.9 million. Soft money was next at $504 million, followed by individual contributions of $290.7 million and 527 commission donations of $20.6 million.

The study concluded that firms that donate to campaigns experience smaller financial returns than those that don't, engage in less research and development initiatives, and have more debt.

The Carlson study follows calls by public interest groups and corporate governance organizations for more public disclosure and board oversight of corporate campaign activity.

"Political donations largely have been kept in a black box," Wang said. "They're not disclosed in financial statements or to shareholders."

Contributions, while recorded and posted by the Federal Election Commission, require time-consuming work to find patterns in political giving, Meschke said. "It's a non-trivial task to get that data."

Some of the most politically active corporations of recent years also are among the most notorious: Enron, Global Crossing, WorldCom, Qwest and Westar Energy. Each made campaign contributions part of flawed business strategies, according to the Washington-based Center for Political Accountability.

"When you look at all the corporate scandals we've had in recent years, all were heavy political spenders buying influence," said Bruce Freed, executive director of the center. "It's an issue of board oversight. Many directors don't understand the information they need, how to evaluate it and what the risks are, both legal and reputational risks."

The study found that companies that have strong governance features, including a separate chairman and chief executive, lower CEO compensation and large insider stock ownership, tended to make smaller contributions.

Larger contributions, the study suggested, often were symptomatic of corporate ills. "Firms that experience negative productivity shocks may donate to try to offset the shock," the study said.

Aggarwal said companies that have strong governance structures are less likely to "waste cash" on donations or to overpay the CEO.