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Demand Transparency in Politics: Divest from Dark Money
10 / 30 / 2018
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During the 2016 elections, campaigns spent $6.3 billion to influence voters. That’s an almost unthinkable amount of money for most Americans - so where is it all coming from?

During the 2016 elections, campaigns spent $6.3 billion to influence voters. Only one third of that amount went to the presidential election, meaning just over $4 billion was spent on congressional campaigns and legislative initiatives across the country.1 That’s an almost unthinkable amount of money for most Americans – so where is it all coming from?

Unfortunately, it’s almost impossible to know, thanks to the legal loopholes that create “dark money”. Dark money is defined by campaign finance watchdog OpenSecrets as “political spending meant to influence the decision of a voter, where the donor is not disclosed and the source of the money is unknown”.2 In 2015 for example, $15 million was spent by political organizations – but the sources for only $5 million were disclosed to the Federal Election Commission.

So what makes dark money dark? Contributions of more than $200 are available on a public record maintained by the Federal Election Commission (FEC), but making contributions through a secondary group can hide its original source. The IRS exempts certain kinds of organizations from disclosing the sources of their funds. These organizations donate millions to political campaigns, and while we know where their funds go, we don’t know where they come from. The most common exempt organizations are nonprofits (classified as 501s or 503s), PACs (political action committees) and Super PACs (classified as 527s).

For example: the US Chamber of Commerce, a lobbying group that has spent $43.7 million this year alone, is designated as a 501(c)(6). The Republican State Leadership Committee, which spent millions to win state legislatures and redistrict states in Republican favor after the 2008 election,3 is a 527.

If all that dark money was coming from private citizens, there wouldn’t be much to say. However, corporations spend hundreds of thousands of dollars each year influencing public policy, and have far more money than actual American voters to do so. Worse still, most of these are public corporations, which means we own them. As a shareholder, how would you feel if you found out your investments were being used to elect politicians fighting against your values?

That’s why it’s important for companies to voluntarily disclose their political and lobbying spending. That way, voters and shareholders of any political leaning can decide whether their funds are being used the way the want them to.

Transparency of political spending is a nonpartisan issue, but even so, it’s been slow to catch on. The Center for Political Accountability tracks companies’ willingness to disclose their political spending. Their annual CPA-Zicklin Index (developed with the Zicklin Center for Business Ethics Research based at the University of Pennsylvania) rates S&P 500 companies (the biggest publicly owned American companies) on a variety of criteria that reflect how open they are about political spending, from the decision making process to how well they archive the information.

Here are this year’s key takeaways:

  • The average rating is 44.1% (where 100% is the highest and best rating)
  • Only 11% of companies fully disclose their spending
  • 12% of companies don’t disclose any spending
  • 10 companies did worse than they had the previous year, while 6 companies failed to make good on disclosure promises.

This year’s report notes that companies with good disclosure ratings are positively correlated with shareholder activists, and OpenInvest users will remember voting on shareholder resolutions asking companies to disclose their political and lobbying expenses. Over the last several years, shareholders have formally asked almost 200 S&P 500 companies for increased accountability and disclosure – and over half of those companies agreed. The average CPA-Zicklin score for companies who have been engaged by their shareholders is almost 25% higher than those who haven’t. And now, investors can take their activism a step further.

Using the CPA-Zicklin Index, OpenInvest has created a new Dark Money screen to allow any investor to tailor their investments to companies prioritizing transparency in their spending. When applied, the Dark Money screen divests you from companies with the lowest ratings (below 10%) and makes sure you’re invested in those with the highest ratings (above 80%.) Fortunately, OpenInvest’s algorithms ensure that those selections don’t threaten the long-term passive nature of your investments.

You can encourage greater transparency in corporate political spending in two ways: by withholding your money from companies who don’t participate, and by voting in the shareholder resolutions demanding accountability. Show corporations that you want to know exactly where your money goes, and that you’ll vote with your dollars to get there.

 

Historical performance is no guarantee of future returns. Any investment strategy carries with it a risk of partial or total loss of the capital deployed.

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