On July 11, the States United Democracy Center and the Brookings Institution published a new report by Princeton Professor Layna Mosley, cautioning that the erosion of democratic practices and norms in the United States poses risks for investors. The report provides a range of tools for institutional investors to mitigate those risks and help protect American democracy.
The report makes clear that the risks posed by democratic erosion are material, meaning that to fulfill their fiduciary duty, institutional investors must closely consider political risks. To do so, understanding the potential dangers and vulnerabilities that undermine democratic principles is crucial. Economic volatility, increased capital costs, reduced business activities, and threats to the liberal international order are among the risks associated with democratic erosion.
The report explores democratic backsliding in America, global and U.S. democracy landscapes, and the connection between political risk and economic outcomes, and also offers concrete suggestions to effectively respond to these risks.
Key recommendations for mitigation include:
Institutions should add U.S. political risk to the set of factors assessed when seeking to safeguard the assets of shareholders and beneficiaries.
When seeking to acquire existing operations or open new ones, businesses should consider a state’s voting laws and assurances of full access to the ballot, as well as any state-level efforts to interfere with the democratic process.
Institutional investors should advocate for full disclosure of corporate lobbying expenditures as a means of ensuring that lobbying is consistent with corporate strategy, as well as with respect for democratic political institutions.
Institutional investors should identify an appropriate subset of U.S. portfolio companies (based on risk profiles, market impact, and responsiveness, among other factors) and focus mitigation strategies — including discussions of U.S. political risk — on them.
Leadership Now was glad to provide input to the analysis.
To view the full report, click here.
Additional resources:
Review our Democracy State Report Cards, which help business leaders make informed decisions about investing and operating in all 50 states.
Our Corporate Civic Engagement Best Practice Guide has case studies and resources for business leaders.
