Print this article | Return to Article | Return to CFO.com
Banned from making political donations, companies harvest them from employees instead.
Tim Reason, CFO Magazine
July 1, 2004
It took the Watergate scandal to convince Congress to put an end to direct contributions from companies to federal politicians. It took 30 years and another scandal — Enron — to stop the resulting flow of so-called soft money from corporate coffers to political parties.
That doesn't mean the corporate connection has been severed. So far, the Bipartisan Campaign Reform Act of 2002, or BCRA (the eventual fruit of the long-embattled McCain-Feingold bill), has succeeded in its twin goals of halting corporate contributions and increasing individual donations. But politicians still expect companies to deliver campaign cash. In other words, the BCRA didn't relieve companies of the pressure to pony up; it simply said the funds couldn't come from their coffers. Where once they simply cut a few big checks, companies must now collect thousands of smaller ones — from executives, employees, and business contacts. This new political reality is evident in the resurgence of corporate political action committees (PACs) and the emergence of "bundlers" seeking contributions in the workplace. Both come with potential legal, regulatory, and administrative headaches.
Return of the PAC
Since the early 1970s, the PAC has been the most common vehicle for corporate political involvement. Corporate PACs collect money from executives and employees, and usually contribute to incumbent members of Congress. Because they are limited to giving $5,000 per federal candidate per election cycle, the influence of corporate PACs waned in the years before the BCRA, says Larry Noble, executive director of the Center for Responsive Politics, in Washington, D.C. "Why give $5,000 when you could give $100,000 [in soft money]?" he asks.
Today, the PAC is back. "There is now a void in campaign finance, and that void has to be filled somehow," notes Wesley Bizzell, an attorney at the Washington, D.C., office of Winston & Strawn LLP. "Our corporate clients are receiving more requests for political contributions and are responding by starting or revitalizing their PACs."
Although the total number of PACs declined slightly last year, to 3,868, the number of corporate PACs — by far the largest category — continues to grow: there were 1,605 registered as of late May. Indeed, 67 new corporate PACs were registered in just the first five months of 2004. That's almost as many as were registered the entire year before the BCRA was passed.
Companies should pay close attention to this trend. Although prohibited from contributing to their own PACs, companies may provide their PAC with unlimited administrative and executive support. That's a potentially expensive activity, particularly for the finance department. In a CFO magazine survey of 285 finance executives, 56 percent reported that they or someone in their department served as treasurer or provided financial or administrative management for their company's PAC.
During a period of otherwise heightened financial controls, PACs also represent a tempting pool of loosely counted cash. The largest corporate PAC, United Parcel Service Inc.'s, took in $2.8 million this year. With such relatively small sums at stake, says Bizzell, "audits are at the whim of the corporations, which don't always bother to invest the time or money." Among PACs run by politicians, such poor controls have resulted in several recent cases of embezzlement. In May, for example, Earl Allen Haywood, the former assistant treasurer of The (Sen. Elizabeth) Dole North Carolina Victory Committee and the North Carolina's Salute to George W. Bush Committee, was sentenced to 18 months on mail-fraud charges, after admitting to stealing more than $170,000 from the two groups.
This has been rare in the corporate world. But in January, Lockheed Martin Corp. discovered that its assistant PAC treasurer, Kenneth D. Phelps III, had stolen almost the same amount — $170,000 — by writing checks to himself.
I Gave at the Office
More may be tempted. A CFO analysis found that 58 percent of companies in the S&P 500 have PACs. And of the executives surveyed by CFO whose companies already have PACs, 40 percent reported that they give more now.
"I'm not at all surprised to see greater emphasis on PACs," says Charles E.M. Kolb, president of the Committee for Economic Development, in Washington, D.C. "That's a good thing, because the money comes from individuals, and it's the individual who votes."
But that comment suggests PACs are genuinely conduits for individual giving. The reality is much fuzzier. Corporate PACs promote company interests, not employees' political ideologies. Of the finance executives surveyed by CFO, 28 percent said they didn't even know where their PAC contributions went, 61 percent said they had no influence (but were kept informed), and only 12 percent said they helped decide how to allocate the money.
In theory, employees give because they consider their career interests to be closely aligned with their employer's interests. But is that the real reason? "There is pressure in corporations to be a team player," declares Bill Allison, managing editor of the Center for Public Integrity, in Washington, D.C. "If you're an ambitious employee in lower levels of management, you may feel that donating is in your interest."
That pressure apparently exists at higher levels, too. In CFO's survey, 79 percent of respondents held the title of vice president or higher (among them, 45 percent were CFOs, 17 percent controllers, and 11 percent vice presidents of finance). Yet even at those levels, 24 percent said not giving to their corporate PAC could be detrimental to their careers, and another 16 percent said they were unsure.
At many companies, employees have the option of making a regular donation — via automatic payroll deductions — to their corporate PAC. Federal Election Commission (FEC) records show that among upper management, these donations are often calculated to add up to exactly $5,000 per year — the legal limit for individual donations to PACs (see "Big Spenders," at the end of this article).
Of course, federal election laws prohibit coercing employees into giving. In 1988, the U.S. Supreme Court ruled that union workers could "opt out" of paying the portion of dues that support a union's political activities. Nonunion employees face less pressure, since they "opt in" to automatic payroll deductions. The law does not consider a payroll deduction or a supervisor's request for a donation to be coercive, explains Bizzell, but any solicitation must include a disclaimer informing employees of their right to "refuse to contribute without reprisal."
Nonetheless, almost 40 percent of top finance executives don't fully believe their careers are unaffected by their workplace political contributions. And if PAC contributions blur the line between individuals and their companies, the latest trend in office solicitations — bundling — makes the distinction even more obscure.
A Bundle of Money
In the current Presidential race, say watchdog groups, the bundling of individual contributions has had a far greater impact than PACs. As of May, PACs had donated just $2.7 million to Bush and $140,000 to Kerry. That's a mere fraction of the $201 million raised by Bush and the $117 million raised by Kerry. "The big money is coming from bundling," declares Allison.
The BCRA doubled to $2,000 the amount individuals can donate to each federal candidate. While that dramatically increased individual contributions, it also led to President Bush's Rangers program (for people who pledge to gather $200,000 in individual contributions) and Pioneers ($100,000), as well as Kerry's Vice-Chairs ($100,000) and Co-Chairs ($50,000).
"The vast majority of [bundlers] are corporate executives," says the Center for Responsive Politics's Noble. "They are recruited not for their ability to write a check, but because of their contacts with other executives in the company and industry, as well as customers and suppliers." Once again, that prompts the question: Do the bundlers represent themselves, their company, or both?
"It does seem odd that PricewaterhouseCoopers employees contributed more than $200,000 to Bush in just four months," says Allison. "I can't imagine that was a spontaneous movement." Like most campaign-finance watchdog groups, the Center for Public Integrity counts contributions from corporate employees as indications of corporate support for a candidate. By that measure, PwC is now Bush's top career patron, with $607,498 in contributions, narrowly edging out MBNA ($606,291). Kerry's top patron is law firm Mintz, Levin, Cohn, Ferris, Glovsky and Popeo PC ($243,346), followed by FleetBoston Financial Corp. ($195,637).
Despite Noble's description of bundling as "the biggest tool in the corporate shed," just 3 percent of the respondents to CFO's survey said they were aware of a Bush or Kerry bundler working for their company. That represents only eight companies. But given the amount that each bundler pledges to raise, argues Noble, those companies are a "pretty powerful" source of funds. "Remember," he says, "just 0.02 percent of the general public even give contributions."
Indeed, a bundling effort can resemble a no-limit PAC. Unlike PACs, however, bundling efforts are organized by individuals. That makes it harder for corporations to avoid running afoul of federal election laws — such as a supervisor failing to tell employees about their right to refuse to contribute without reprisal. That issue made headlines in November, when former Bank of America Corp. executive Duncan Goldie-Morrison claimed he was pressured to make political contributions by company executives.
There are also strict rules against reimbursing someone for making a donation. Indeed, one reason corporate political activity is a potential concern for finance is that illegal reimbursements using corporate funds are typically channeled through expense reports or bonus disbursements. "The problems we've seen at various corporations typically result from a lack of controls," notes Winston & Strawn's Bizzell.
So far, the FEC has not publicly announced any cases of bundlers stepping out of bounds in the current race. "The FEC is not known for turning actions [against corporations] around expeditiously," says Bizzell. But recent actions against corporations do highlight the potential risks posed by overzealous executives (see "Pay Back," at the end of this article).
Fortunately for corporations that don't enjoy politics, the nominating conventions for Kerry and Bush should ease the pressure to fund Presidential campaigns. Currently, both candidates are expected to accept $75 million in government funding for the general election. But a big question still looms: Did soft money really go away?
In May, after a contentious debate, the FEC finally ruled that it will not regulate 527s. These tax-exempt organizations — the best known are MoveOn.org and America Coming Together — are essentially new avenues for soft money that were formed in the wake of the BCRA. Nominally independent of the national political parties, they raise funds for advertising and voter-registration campaigns. To date, they have been used primarily by Democrats, but Republicans are expected to catch up quickly now that the FEC has ruled. The Committee for Economic Development's Kolb, a Republican, says he had hoped the FEC would regulate 527s as if they were federal PACs, but now predicts "the Republican versions of [financier and large 527 donor] George Soros will be ready with their checks." Or, as Noble puts it, "the history of loopholes is that the Democrats find them and the Republicans exploit them."
Because of the legal uncertainty, corporations until recently shied away from 527s, with the exception of the Republican and Democratic Governors Associations, which are considered more akin to state-level political parties (see "Future Presidents' Club," at the end of this article). But what of the ideological 527s bent on influencing Presidential races?
"Now that the FEC has taken a hands-off approach," says Bizzell, "I expect that more corporations will begin to take advantage of 527s." Allison of the Center for Public Integrity says corporate donations to 527s have been small to date, but adds, "If corporations want to help a candidate, they are going to have to go the 527 route."
Noble isn't sure that will happen. "A lot of companies gave because they wanted to be noticed; they wanted that face time. Even if they didn't want to give, they were told by their lobbyists they needed to give to get in the door. But when you move it one step away [from the national parties], a lot of the pragmatic givers drop out."
For example, the Club for Growth, the second-largest conservative 527, describes itself as "dedicated to advancing public policies that promote economic growth," yet has only a handful of corporations listed among its top 300 donors (although many of its individual donors are associated with corporations).
Whether or not corporate soft money makes a comeback, companies hoping recent reforms would free them from the headaches of political contributions will probably be disappointed. Likewise, those that want to use contributions to advance an agenda will find the effort far more difficult than in the past. And in both cases, companies should be aware of the increasing pressure on top-level executives to fill the soft-money void.
Tim Reason is a senior writer at CFO. Additional reporting and research were provided by CFO research editor Don Durfee.
Giving Till It Hurts
Sometimes, business and politics simply don't mix. Take the case of North Canton, Ohio-based Diebold, maker of automatic teller machines, which, says CFO Greg Geswein, has always encouraged employees "to get involved in political activities." Last August, an invitation to a fund-raiser at the home of CEO Walden O'Dell reportedly expressed his commitment to "helping Ohio deliver its electoral votes to the President next year." The problem with that comment, since widely reported, is that 5 percent of Diebold's business is making voting machines, and the company was vying for a contract with Ohio at the time.
Geswein says the letter was actually boilerplate copy sent on behalf of O'Dell, a so-called Pioneer — someone who has pledged to raise $100,000 for George W. Bush's reelection. "The Republican party wrote it and sent it," says Geswein, adding that the issue was blown out of proportion by Democrats. "It's just amazing," he says, shaking his head. "Like we would fix an election."
Still, he admits, "in hindsight, it probably didn't pass the smell test." And the bad publicity — coupled with challenges to the security features of Diebold's machines — clearly hurt, with Democratic Presidential hopeful John Kerry vowing to challenge votes from Diebold machines. "The scrutiny on political issues and voting has been an amazing thing for me," O'Dell told analysts in a 2003 fourth-quarter call.
The response of the executive team? "We have stopped giving," Geswein told CFO in February. In June, the company went a step further. In a Securities and Exchange Commission filing, it reported that it had formally altered its business-ethics policy to prohibit contributions or "any [other] political activities, except for voting," by Diebold's CEO, president, and CFO, and by all executives and employees of the company's voting-machine division. —T.R.
Several companies and their executives have been fined in the past two years after executives reimbursed employees — and themselves — for political donations.
Audiovox Total fines: $849,000
Last July, the Federal Election Commission (FEC) levied its highest combined fine ever after executives at two Audiovox subsidiaries, ACC and Quintex, reimbursed employees (and some distributors) for donations to Democratic and Republican congressional candidates out of petty cash and expense-account funds. Two controllers and one vice president of finance at the subsidiaries were fined. ACC controller Thomas Doherty, who prepared expense reports to reimburse himself and other employees, later told the FEC he "did not know the reimbursements violated the [Federal Election Campaign] Act." As part of its settlement, the Hauppague, New York-based company instituted a program to educate employees about campaign-finance rules.
Centex Total fines: $168,000
Between 1997 and 2002, executives at two subsidiaries of this $10.4 billion (in revenues) construction firm encouraged employees to report their political donations, then reimbursed them through a discretionary bonus program. Donations went primarily to congressional candidates from Florida and to the Bush 2000 campaign, and some were solicited by executives, including Bob Moss, CEO of Centex-Rooney Construction. One of two CFOs involved, Gary Esporrin, grossed up the amounts to offset employees' added tax liabilities for the bonus. Some $56,125 was reimbursed before the Dallas-based parent company discovered the program and reported it to the FEC.
Mattel Total fines: More than $900,000
The El Segunda, California-based toy maker reported itself after discovering that its former senior vice president for government affairs, Fermin Cuza, reimbursed AMS Consulting Services LLC for $120,714 in political donations between 1996 and 2000. According to the FEC and news reports, Cuza relied on Mattel's third-party bill-paying service — used by Mattel to speed payment to preapproved vendors — to bypass the accounts-payable department. The contributions went to 23 Democratic congressional candidates, the Democratic National Committee, the Gore 2000 campaign, and state and local politicians in California. Mattel, Cuza, and AMS were fined by the FEC and state and local officials.
Future Presidents' Club
The Republican and Democratic Governors Associations split from the national parties and became 527s after the BCRA passed so they could continue to accept soft money. Both receive substantial amounts from corporations, including:
Republican Governors Association
Democratic Governors Association
What CFOs at the largest companies (based on 2003 revenues) have given — or not given — this election cycle (2003-2004). PAC donations listed here may exceed $5,000/year limit if made over the two years of the cycle.
|Thomas M. Schoewe||Wal-Mart Stores||*||$250||—|
|Frank A. Risch||ExxonMobil||*||$2,000||—|
|John M. Devine||General Motors||$5,000||$2,000||—|
|Other contributions: Democratic Congressional Campaign Committee — $2,000; John D. Dingel (D-Mich.) for Congress Committee — $1,000|
|Donat R. Leclair||Ford Motor||*||$2,000||—|
|Other contributions: John D. Dingel for congress committee — $1,000|
|Ralph Rambach||Blue Cross and Blue Shield||$300||*||—|
|Keith S. Sherin||General Electric||$3,000||$2,000||—|
|Other contributions: McKenna (R-Ill.) for Senate — $2,000; Friends of Chris Dodd (D-Conn.) 2004 — $2,000; Leahy (D-Vt.) for U.S. Senate Committee — $2,000; Friends of Schumer (D-N.Y.) — $2,000|
|John S. Watson||ChevronTexaco||*||$2,000||—|
|John A. Carrig||ConocoPhillips||*||$2,000||—|
|Todd S. Thomson||Citigroup||$6,656||*||—|
|Other contributions: Keep our Majority PAC (Republican) — $2,000|
|Dinyar S. Devitre||Altria Group||$5,000||*||—|
|Other contributions: Cantor (R-Va.) for Congress — $1,000; Friends of Schumer — $1,000; Friends for Harry Reid (D-Nev.) — $1,000; Rangel(D-NY) for Congress — $1,000|
|Howard I. Smith||American International Group||$10,000||$2,000||—|
|Other Contributions: Friends of Mark Foley (R-Fla.) — $1,000; Missourians for Kit Bond (R-Mo.) — $1,000; Mike Crapo (R-Idaho) for U.S. Senate — $1,000; Friends of Chris Dodd — $1,000; Grassley Committee (R-Iowa) — $1,000; Lisa Murkowski (R-Alaska) for U.S. Senate — $1,000; team Sununu (R-N.H.) — $500; Carper for Senate (D-Del.) — $1,000; Larson (D-Conn.) for Congress — $1,000; Evan Bayh (D-Ind.) Committee — $1,000; Johnson (R-Conn.) for Congress Committee — $1,000|
|Robert P. Wayman||Hewlett-Packard||$5,000||*||—|
|Jeffrey C. Campbell||McKesson||*||—||—|
|Doreen A. Toben||Verizon Communication||*||$1,000||—|
|Other contributions: McCain (R-Ariz.) for Senate '04 — $1,000|
|Carol B. Tomé||The Home Depot||*||$2,000||—|
|Marc D. Hamburg||Berkshire Hathaway||*||—||—|
|J.R. Eagan||Shell Oil||*||—||—|
|Robert L. Lumpkins||Cargill||*||$2,000||—|
|Other contributions: Jack Ryan (R-Ill.) for U.S. Senate — $500|
|Michael L. Tipsord||State Farm Insurance||*||$2,000||—|
|Other contributions: Financial Services Roundtable PAC (donates to Republicans and Democrats) — $750|
|J. Timothy Howard||Fannie Mae||$10,000||—||$2,000|
|Other contributions: Financial Services Roundtable PAC (donates to Republicans and Democrats) — $750|
|James A. Bell||Boeing||*||—||—|
|Other contributions: Obama (D-Ill.) for Illinois — $1,000|
|Richard J. Miller||Cardinal Health||*||—||—|
|Sources: Political MoneyLine, Hoover's|