Target's Off-Target Campaign Contribution

Editor's Note: Updates with Target CEO's apology in letter to employees.

Target (TGT), the second-largest U.S. discount retailer, has become an early test case of a Supreme Court ruling that allows companies to spend unlimited amounts to sway voters in federal races. It donated to a business advocacy group, which used the funds to run an ad supporting a socially conservative Republican candidate for governor of Minnesota. Along the way, Target enraged the gay community, offering up a cautionary tale for other corporations about taking sides in political campaigns.

When the Supreme Court ruled in January that companies and unions can use their money to help elect or defeat candidates for federal office, bans on corporate spending in 24 states, including Minnesota, were in conflict. Newly freed, Target made a $150,000 donation on July 6 to a nonprofit, MN Forward. Six other Minnesota businesses, including Best Buy (BBY), followed suit with $100,000 gifts. MN Forward then ran an ad for Tom Emmer, an outspoken opponent of gay marriage who faces an Aug. 10 primary. The ad didn't mention Emmer's position on the issue, focusing instead on his opposition to taxes and spending.

Still, gay-rights advocates saw the donation as a betrayal by Target, which has long cultivated support among gays by, for example, providing health benefits to domestic partners and sponsoring Twin Cities Pride, an annual celebration. Since the contribution became public, as required under Minnesota law, calls for a boycott and other protests have mounted on YouTube (GOOG) and Facebook. "We feel betrayed," says Jeffrey Henson of Portland, Ore., who started an anti-Target Facebook group that has almost 40,000 followers. Protesters have also stood outside Target stores with placards denouncing the company.

In a letter to employees on July 27, Chief Executive Officer Gregg Steinhafel said the contribution was based solely on MN Forward's advocacy for jobs and economic growth. Target later expressed regret in a statement that it had "let down our team members and guests." In a second letter on Aug. 5, Steinhafel apologized to workers for the donation to MN Forward. "I realize our decision affected many of you in a way I did not anticipate, and for that I am genuinely sorry," he wrote. He said the company would "soon begin a strategic review and analysis of our decision-making process for financial contributions in the public policy arena." Lena Michaud, a Target spokeswoman, declined to elaborate.

Target's stock seems to be holding up: Its shares closed at 51.50 in regular trading on Aug. 4, in line with the share price before the donation became public. Stephen Pruitt, professor of finance at the Bloch School of Business at the University of Missouri-Kansas City, on July 30 predicted Target would have to offer a stronger apology. "No firm, particularly in this economy, can afford to tick off anyone," says Pruitt, the co-author of a 1986 study of 21 consumer boycotts that showed an average drop of $120 million in market value at boycotted companies.

The dustup demonstrates the power of "private regulation," says Brayden King, assistant professor of management and organization at the Kellogg School of Management at Northwestern University. Goldman Sachs (GS), which has had to defend its actions during the financial crisis, says it will not take up the court's invitation and will refrain from funding any political advertising. "There's still a market out there for reputation," says King. "Activist communities are well aware of that and will use it as a way to get leverage."

The bottom line: Target's experience with a campaign contribution holds lessons for companies considering whether to fund political ads.

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