Should Companies Make Political Donations?

Companies across major sectors of the market are reassessing political donations in response to the January 6th storming of the U.S. Capitol, but it is too soon to know whether it leads to fundamental changes in the way money flows between politics and business.  In this video we discuss whether companies should make political donations?

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Transcript

This channel is a finance channel, and I mostly aim to avoid politics, but back in April I made a bit of a slip by controversially endorsing Count Binface in his run for mayor of London.  At the time I was pretty sure that Binface was guaranteed to win, and it seemed to me that if I could be seen to endorse him that I might have some political influence going forward. It was quite a surprise to me when some other guy won the election and I was then forced to flee London in fear of political retribution.
Yesterday, you might have seen in the news that Toyota decided to halt political donations to certain Republicans who voted against the certification of President Biden's election win. Toyota’s political giving arm had donated a total of $56,000 to 38 of the Republican members of Congress who voted to throw out the election results in January of this year, that averages to just under $1500 per congressperson.
In their statement, Toyota pointed out that they equally supported Democrats and Republicans, adding that the majority of their contributions went to Democrats and Republicans who supported the certification of the 2020 election.
Corporate political donations are a fascinating subject. They reek of corruption - where individuals or interest groups appear to be buying access to political figures, and possibly requesting favorable legislation or government contracts in return. The whole question of companies or wealthy individuals funding political campaigns looks suspicious. There is an assumption that some sort of ‘quid pro quo’ must exist and that assumption lies at the heart of most political finance legislation. 
In the United States a 1907 act of Congress prohibits corporations from donating directly to political campaigns and so as a work around, corporate executives and shareholders instead create PACs (or political action committees), which funnel company raised money to a particular political candidate. Data on donations from corporate PACs is freely available from the Federal Election Commission in the United States.
Companies don’t just give money to political organizations; they also frequently make charitable contributions. This can be controversial with shareholders too, as corporate philanthropy is inconsistent with maximizing shareholder wealth, because giving money or other assets away contradicts the profit-maximization purpose of a company. Many argue that if corporate management want to donate money to a charity, they can donate their own money - corporate funds belong to shareholders. 
As you can imagine with both political and charitable donations, not every shareholder is going to agree with the choices made by company management. This is why Toyota got all of this bad press recently.
Fortunately, a lot of research exists on topics like this.  There is always going to be a conflict of interest in any relationship where one party is expected to act in another parties’ best interests. This is known as an agency problem in finance. A company’s management team are supposed to always act as agents for the shareholders and make decisions that maximize shareholder value, but they are often conflicted by their desire to maximize their own wealth, or their influence in the world.
A paper by Liang and Reneboog from 2016 looked into corporate donations and shareholder value.  They analyzed corporate political donations around the 2010 UK elections and found no positive effect on share price in companies that made political donations.  So, the money spent on political donations was effectively wasted – it provided no benefit for the owners of the companies in question.
For charitable donations, they found that for the largest corporations’ charitable donations were actually associated with higher shareholder returns.  
At first this might not appear to make much sense, but they put forth that these charitable donations could possibly function as an effective marketing tool for the companies in question – improving their brands and their reputation with consumers. In addition, the donations might make employees of these firms feel better about where they work. This could both increase employee retention, and reduce salary costs.  The study points out that there are also some small tax savings associated with charitable donations, and when all of these effects are combined, these donations might actually improve corporate financial performance, or at least not harm it.
When they looked at the relationship between corporate donations and various indicators of good corporate governance, the researchers found a small, but weak relationship between political donations and indicators of poor corporate governance. Companies with poison pills, CEO’ s who are also the chairperson of the board, and firms with strong anti-takeover devices were more likely to make political donations. These corporate structures are all things that strengthen the power of management relative to that of shareholders. In the paper they show that firms with a poison pill in place make political donations that are 3.2% higher on average. So the takeaway is that in situations where management are entrenched, they possibly make political donations using company funds to strengthen their personal relationships with influential people, doing this more for their own personal benefit than for the benefit of shareholders.
The study didn’t find any relationship between corporate charitable donations and entrenched management. Companies with good and bad corporate governance structures seemed to donate similar amounts of money to charities.
Another study that I found quite interesting was by Spenkuch, Garro and Fowler who analyzed the stock performance of American companies that back winning candidates in elections.
The idea was to see if the stocks of companies that gave money to election winners performed better, than those that gave money to election losers. Markets usually react quickly to new information and so, they figured that stock performance in the days after an election should be a good indication for how investors believe an election will affect a company’s future success.
If a company’s stock price rose meaningfully after the election of a candidate that the company had donated to, it might indicate that investors believe that the company has better prospects because of the corporate donation. Investors possibly expect that the company will get political favors, high-level insider information, or see government policies put in place that are favorable to either the company or its industry.
The team made a few surprising discoveries in their research.  Firstly, they found that larger and more successful companies tended to bet on candidates that ended up winning, while smaller, weaker companies were more likely to support losing candidates. The reason for this is not entirely clear—it could be that more successful management teams are just better at predicting future events, or it could be that already successful companies are happy with the status quo and support consensus candidates, while less successful companies are hoping for changes to occur and so spend money on candidates with a lower chance of winning.
Whatever the reason, the companies that gave to election winners were likely to have higher-performing stocks before the election than the companies that gave to losers and this outperformance then continues after the election. They argued that simply comparing the post-election price changes of companies that picked winners versus losers could be meaningless, and just show stock price momentum in successful companies.
So, they moved on to analyze extremely close elections—those where the candidates’ vote tallies were within five percent of being a tie. The thinking went that both big and small companies would have a fifty-fifty chance in such scenarios of picking a winner. They could then see if companies derive significant favors from their political donations.
They found that in these situations, the companies who had donated to a winning candidate saw their stock price increase by point zero five percent. Not only was this a tiny result, but it was also statistically insignificant, meaning the results could be attributed to randomness.
In a final piece of research, the team looked at 119 Senate races between 2004 and 2010, analyzing the relationship between changes in the gambling odds on each candidate, and the stock performance of the companies that had donated to them. They examined how the stock of a company reacted when their candidate’s probability of winning changed.
Once again, they found no significant relationship. So, in conclusion, the political connections that are forged by donating to politicians don’t seem to be reflected in stock price performance, donations don’t appear to buy meaningful political favors.
Several large companies, including Facebook, Microsoft and JPMorgan Chase, said they would pull or review political donations after the events of January 6th.  It would appear that there is no upside for these companies, that they are squandering shareholder wealth, and they run the risk of being attacked in the press for their political affiliations. Let me know your thoughts in the comments section.
I get the feeling that both investors in - and customers of - large companies would probably be happier if the companies just got on with their core business rather than expressing the values of management through spending investors’ money on political donations.  Some of this reminds me of a great piece of stand-up comedy by Stewart Lee, on “The Values of The Carphone Warehouse”. I’ll put a link to it below. Do you follow the values of Jesus or Buddha or Marx?  No…   I follow the values of the Carphone Warehouse…
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See you guys later, bye.