Please Don't Feed the Politicians

Next election cycle, when an employee makes a personal political contribution, beware: it could harm a company's ability to win government contracts.

Many municipalities and some states are passing so-called pay-to-play rules that are designed to discourage contractors, and in some cases their executives, from contributing to candidates who have the authority to issue or influence government contracts. The rules set limits on contributions or exclude them outright. "For prosecutors, it's hard to show a quid pro quo between a contribution and a contract," notes Wesley Bizzell, an attorney specializing in campaign-finance law at Winston & Strawn. "Pay-to-play rules make enforcement easier and get around the burden of proof."

Illinois is currently considering legislation that would restrict campaign contributions by government vendors. New Jersey's pay-to-play law went into effect in January. And such states as California and Ohio, as well as the cities of Houston, Los Angeles, Philadelphia, San Francisco, and Oakland, Calif., have similar rules in place.

The restrictions could create potential problems for companies that lack diligence in tracking contributions from their executives and political-action committees. Robert Kelner, a partner at law firm Covington & Burling and chair of the firm's election and political law practice group, notes that more companies are starting to subject their political activities to compliance programs. And some are adding a new position—political law compliance officer—to lead the effort. The intense scrutiny comes on the heels of a number of scandals involving campaign contributions and lobbying efforts. For example, prosecutors are still investigating allegations that Mitchell Wade, founder and former CEO of San Diego defense contractor MZM Inc., made illegal campaign contributions to a number of influential lawmakers. He has pleaded guilty to making bribes to former representative Randy Cunningham (R–Calif.), who also pleaded guilty and is serving a sentence of eight years and four months.

Companies are keeping a closer eye on executives' personal political giving as well. In August, Oracle announced that it would offer executives legal assistance on the filing of such contributions. The move will help the software giant avoid running afoul of complex contribution rules. "We've begun to see corporations dedicating manpower and resources to these particular types of compliance issues and amending corporate policies because the cost of noncompliance is getting higher," says Caleb Burns, an attorney at Wiley Rein & Fielding.

Investors, too, are demanding more transparency on political giving. Last proxy season, proposals calling on companies to disclose campaign contributions accounted for nearly 18 percent of all socialpolicy proposals put to a shareholder vote, according to a report by Proxy Governance Inc.

It is still unclear how strictly pay-to-play rules will be enforced. "I suspect some large companies will get into trouble because they will become aware of [these laws] only when there is a big enforcement action," predicts Kelner. "It might take some time to see how much teeth they have."

Then again, given the combative political environment, it shouldn't take long for one side to demand that the rules be put to the test.

States with Pay-to-Play Laws

California, Connecticut, Florida, Hawaii, Illinois, Kentucky, Missouri, New Jersey, Ohio, South Carolina, Vermont, and West Virginia

Local Jurisdictions with Pay-to-Play Laws

Los Angeles, Oakland, San Francisco, and Culver City, Calif.; Philadelphia; Houston; and various counties in New Jersey and California

Source: Skadden, Arps, Slate, Meagher & Flom LLP