Executive Summary

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Who owns consumer data? Do consumers trust companies with their data? Will consumers embrace new technologies that reveal more information about them to companies? Are companies ready to respond to changing attitudes about consumer data?

These are core questions that investors need to consider about data privacy, the option to shield our personal data from public view or corporate use and sale. Currently, companies have largely unfettered access to the data they gather about consumers, even as technologies make it possible to know more about consumers’ online (and offline) activities. By some estimates, the number of devices connected to the internet will rise from 8 billion today to 100 billion by 2030. As devices proliferate and data-mining tools become more sophisticated, companies have increasing access to information such as our physiological traits, personal habits, location, political beliefs, lifestyle habits and purchasing behavior.

Such data may give rise to products and services that we can only imagine at present. But these potential advances come at the cost of diminished consumer privacy and the risk that our data will be used for purposes society may neither intend nor desire, such as discrimination, employee surveillance, social engineering, or unfair political influence.

Both consumer attitudes and the regulatory environment reflect deep ambivalence about the role of data in the modern economy. Studies show that many consumers do not support collection of their data, but feel powerless to prevent it. Although data flows globally, the regulations that govern it are regional and inconsistent: e.g., new EU regulations strengthen consumers’ control over the use of their personal data, while the US regulatory environment remains permissive.

Even as society struggles with the tradeoff between innovation and control, investors have demonstrated a keen interest in companies with strategies to monetize this growing pool of data. Companies have always sought competitive advantage through better information. The accelerating supply of personal data has raised the importance of data access and analytics to corporate performance, which in turns drives demand for even more data. At the center of this trend are the FANG stocks, for whom data does not merely support their business model but lies at the core of their strategy. Most of The FANG companies did not exist 20 years ago, but now make up nearly 15% of the S&P 500, having been favored by investors in the form of valuations far outstripping the rest of the index.

We believe that the ambiguity of the current circumstances is unsustainable. While the exact future of data privacy is not possible to predict with confidence, investors should be concerned that companies whose business models rely on increasing quantity and scope of consumer data are at risk if the public ambivalence turns to opposition.

To better understand that risk, we consider four potential operating environments that companies may face:

1. Low demand for privacy, low regulation: Consumer acceptance of data collection and use grows, and regulators prioritize the free flow of information over privacy. Technological innovation grows quickly, but the risk of unintended negative social consequences, such as discrimination, rises. In this scenario, companies that have high exposure to data would be best positioned to take advantage of the opportunities.

2. Low demand for privacy, high regulation: Overreaching regulations lead to dissatisfaction among companies and consumers, as market demands go unmet. Trust is difficult to obtain because the system lacks legitimacy. Companies with low exposure to data issues will avoid the regulatory risks associated with this scenario. New entrants will struggle to grow while managing compliance costs.

3. High demand for privacy, low regulation: Regulators fail to effectively respond to consumer concerns about data privacy. Technological innovation accelerates, as does the risk of unintended consequences. Lack of trust in the system creates challenges for new companies and products to gain acceptance, and consumers may take steps to restrict access to data on an individual basis. Companies that achieve high trust of employees and consumers are best positioned to navigate the instability of this scenario. In this scenario, new business models may emerge to help consumers protect their own privacy.

4. High demand for privacy, high regulation: Regulators restrict data gathering in response to consumer privacy concerns. Technological progress slows, but the system creates a high degree of trust that enables new companies and new technologies to achieve consumer acceptance with relative ease. Unintended consequences are kept to a minimum. Because no one positioning dominates this scenario, individual company management and governance to establish trust and engagement will take on particular importance.

This report:

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This report was prepared by Cornerstone Capital Group for the Investor Responsibility Research Center Institute.

Barron’s, August 8: Elon Musk’s plan to take Tesla (TSLA) private raises a number of corporate governance questions that the auto maker should answer, writes John Wilson, head of corporate governance and research at Cornerstone Capital, an investment adviser with more than $1 billion in assets focused on responsible investing. Read full article here.

Elon Musk wants to take Tesla private at $420 per share, an amount that would value the company somewhere in the neighborhood of Ford and FiatChrysler combined.  His plan would also enable current public shareholders to retain their shares in an unspecified vehicle or fund that would limit sales to every six months.  Such a deal would force investors to make a choice:  accept an immediate cash premium over their investment or make a substantial bet on the vision of its founder.

The markets and some analysts have cast doubt on whether this plan, which would be the largest leveraged buyout in history, will even take place.  Even so, the announcement raises important governance questions that will be particularly salient for investor decisions about whether to accept the buyout, but also matter if the company remains public.

Question 1: What rights would remaining public shareholders have in the newly private company?

 The stated purpose of the transaction would be to insulate the company from the “wild swings” and “perverse incentives” of the public markets, yet the plan also envisions retaining current investors. This raises concerns that the company values external investment capital but not the accountability that comes with accepting public funding.  Investors should closely scrutinize how their voting rights would change under the new structure, especially since the six-month lockup would prevent orderly exits in the case of a major negative event.

Question 2: How will the company assure investors that the board will hold the CEO accountable for strategy, execution and performance?

Analysts and investors have questioned the independence of the Tesla board, which includes close business associates and the brother of Elon Musk.  These concerns increased with the 2016 acquisition of Solar City, a troubled company in which Musk held a major stake.  Though the transaction raised numerous potential conflict of interest concerns, the board appeared to do little to exercise oversight of the deal, failing even to convene an independent committee to study the purchase.

More recently, there is little indication of any board concern over Musk’s erratic public behavior, one example of which was an uninvited intervention into the rescue of a Thai soccer team from a flooded cave, and crude remarks about one of the rescuers.  Musk eventually apologized, but investors concerned about “key man risk” should expect the board to demonstrate the same concern.

This is especially true in the context of the method the company selected to disclose this information about plans for a possible buyout (tweet and email).  Was the disclosure approved by the board?  Was it reviewed by counsel? Who did Musk consult before choosing to communicate material information through social media?

With an exit from the public markets, the board may become the sole entity that can exercise oversight over management. Shareholders should expect that the board can demonstrate by its actions that it has the qualifications and the independence to ensure management accountability.

Question 3: Why will a private Tesla be more empowered to execute a long-term strategy than a public Tesla?

Companies adopting governance policy changes that reduce shareholder accountability commonly cite the need to empower management to think for the long term by insulating the company from short-term market pressures.  Most companies also understandably resent short sellers with an incentive to “attack” the company.

While there is often merit to these concerns, shareholders should carefully consider whether they apply in the case of Tesla. Although the company has never made a profit, investors have entrusted the company with a rich valuation even relative to future estimates for profitability.

Investors raise concerns not so much about the company’s strategy but about its failure to deliver on its current production targets for the Model 3.  The core investment issues about Tesla are not long-term vision but the short-term mundane details of manufacturing and supply chain management.

The discipline of the public markets is particularly well-suited to driving management to resolve precisely these kinds of concerns. In particular, institutional investors will insist that the board be able to explain why it thinks it has the ideal management team in place given the company’s current circumstances and how it will ensure that this continues to be true.

If the company believes that its long-term vision is being hampered by investor pressure, shareholders should ask it to articulate how that vision would be better served without shareholder accountability, and what assurances Tesla can provide shareholders that it will manage concerns about production.

Question 4: How will the company address concerns about social responsibility?

Tesla was founded as a mission-related company.  Its goal of mass electrification and automation of transportation has implications for climate change, mobility, urban planning and many other social and environmental issues.  Tesla’s sustainability narrative is a major part of its outsized appeal to investors, employees and customers.  However, the company has also been criticized for certain aspects of its corporate social responsibility.

The company has attracted scrutiny of its safety practices, but has provided far less assurance about its safety practices relative to others in the auto industry. These concerns heighten regulatory risk and reinforce concerns about the quality of its manufacturing capabilities.

Moreover, the manufacture of batteries raises numerous sustainability concerns, including the use of conflict materials, the local environmental impact of battery manufacture, and the working conditions for production and supply chain workers, especially in developing countries.

Tesla investors are engaging with the company on these issues, which have the potential to undermine both the company’s brand and investor confidence in its operational management.  Investors should consider how the absence of these outside voices may impact the company’s commitment to improvement in these areas.

Question 5: What risks or benefits should shareholders consider when locking up capital for six months?

The six-month lock-up envisioned in Musk’s plan lies between the liquidity and orderly price discovery of the public markets and the stability of the private markets, where companies can be assured of their investor base.  A six-month lockup would not allow the investor to respond in a timely fashion to material market events, while potentially exposing the company to widespread periodic selloffs if the company’s circumstances change materially.

Because the proposed structure is highly unusual, shareholders should examine the company’s disclosure about its evaluation of the risks and opportunities related to their approach.  Investors need to assess whether the loss of liquidity and the other risks that investors may encounter are adequately compensated by the $420 share offer.   Shareholders will be interested in which of these issues were considered by the company in setting the deal’s price.

Fundfire, June 11: Endowments and foundations that have placed bets on environmental, social and governance (ESG) investing are experiencing the pay-off…“What we’ve seen with ESG strategies, whether they be individual strategies or separate pools, is that they’ve been performing in line or better than non-ESG strategies over time,” says Craig Metrick, a managing director of institutional consulting and research at Cornerstone Capital Group. “ESG strategies tend to do well in down markets. [E]SG strategies have a longer time horizon, lower turnover and can be higher in quality as well, which will help in certain markets.”

Full article here (subscribers only).

Citizen activists are taking to the streets to demand government accountability and action on issues they care about passionately, with groups ranging from #metoo to #neveragain, Black Lives Matter, and the alt-right. Against this backdrop, some of the largest shareholders in the world are now joining long-time shareholder advocates to call for improved corporate governance, equality and environmental stewardship. How will this heightened partisanship and conflict affect relations between companies and shareholders?

Cornerstone Capital Group recently convened our panel of corporate governance experts for a live webinar on hot topics in corporate accountability, sustainability and shareholder engagement. Our Head of Research and Corporate Governance, John Wilson, moderated a discussion with Catherine Jackson of Jackson Principled Governance, independent board director Karina Litvack, and Tim Smith, Head of ESG Shareholder Engagement at Walden Asset Management. Below are the key questions addressed, with video replays of each discussion.

How are shareholders helping to reshape the conversation around gender equality in the boardroom and the workplace?

Accountability and Action on the Slate? Corporate Governance in This Activist Age: Gender Diversity

How are climate competencies becoming a matter of corporate governance?

Accountability and Action on the Slate? Corporate Governance in This Activist Age: Climate Competencies

Some of the largest asset managers in the world have made a new commitment to advocacy on issues such as firearms and climate change—How does their participation change the conversation?

How is the political landscape in the U.S. and Europe influencing the conversation around corporate political activities?

How is the changed political landscape in the U.S. and Europe influencing the conversation around corporate political activities?

Accountability and Action on the Slate? Corporate Governance in This Activist Age: The Asset Manager Role

Some of the largest asset managers in the world have made a new commitment to advocacy on issues such as firearms and climate change—How does their participation change the conversation?

How are climate competencies becoming a matter of corporate governance?

How are shareholders helping to reshape the conversation around gender equality and overall diversity in the boardroom?

This article originally appeared in FA Magazine on May 11.

Do efforts to bring greater diversity to company boards still matter? Some advocates for greater equality in corporations say investors should turn their attention away from “counting women and people of color” to addressing problems that directly affect people’s lives, such as sexual harassment, pay disparities and work/life balance.

But it would be a mistake to divorce the enduring gaps in diversity on corporate boards from broader concerns facing the workplace. As of 2017, 22 percent of board seats were held by women, an increase of only 5 percent over the past 10 years, while women comprise only 6.2 percent of S&P 500 CEOs. 17 percent of board seats are held by people of color (African-American, Hispanic/Latino, or Asian), only a slight increase from 15 percent in 2004. The proportion of non-white CEOs is actually declining.

This is not simply a concern for those who aspire to occupy seats on corporate boards. Companies that draw leadership from a narrow talent pool may be poorly equipped to solve emerging problems of concern for their workforces. Boards that lack diverse perspectives are prone to “group think” or blind spots on issues outside of their members’ experience.

Many companies have claimed that while they were open to women and people of color, they could not find qualified candidates—often reflecting a narrow set of criteria, such as having been a CEO in a related field. Companies that expand their board search criteria to include a range of backgrounds also discover talented and experienced women and people of color. And of course, women and people of color may bring personal experiences that make them more aware of the concerns of an increasingly diverse workforce.

Many larger, established companies now have diverse boards. For those that do not, the problem may not be an unwillingness to consider non-traditional board candidates. Over half of new independent board members are women or members of underrepresented groups. The slow pace of change more likely results from low turnover: in 2017, approximately half of S&P 500 companies added no new board members. While many individual directors continue to bring valuable insights and institutional memory for many years, failing to bring in new talent creates risks that skills grow outdated and that emerging issues go unrecognized. Higher turnover would create opportunities to refresh the board with new perspectives.

To address this, good governance advocates are calling on companies to adopt mechanisms to increase board turnover, such as term limits and more stringent evaluation of director performance. Some investors are also asking boards to explain how the mix of skills and backgrounds, including demographic diversity, positions their company to meet the challenges facing it.

The Role Of Investors

Important emerging social concerns, including sexual harassment, pay disparities and gaps in representation, are also matters of corporate governance. Corporate leadership that responds effectively to the growing demands for fairness and equality will be at an advantage in attracting and getting the most out of talent. Through thoughtful proxy voting and corporate engagement, investors can encourage diverse, continually refreshed boards and management teams that will be best positioned to provide this kind of leadership.

First, investors should use their votes to signal concerns about board diversity. Voting against entire boards that lacks diversity is one recent trend that sends a strong message—but can be disruptive to the smooth running of a company. Investors can also vote against members of the nominating and governance committee or just the chair of this committee. Investors can also support shareholder proposals that call for greater diversity on the board or at all levels of the company.

Another approach is to focus engagement with companies on policies and practices that are likely to increase representation and improve corporate governance. Some questions to consider include:

  1. How does the board ensure it is choosing the most qualified directors from the widest possible pool of talent, including women, people of color, and individuals with the widest possible range of skill sets and backgrounds?
  2. Why does the board believe that the current composition of directors possesses the right skills and experiences to meet the challenges facing the company today and into the future?  What gaps exist?
  3. How does the board provide for its continual refreshment with outside perspectives and allow for the replacement of directors who are underperforming or whose skills are no longer optimal to meet the company’s needs?

What Asset Owners Can Do

Asset owners who engage asset managers rather than investing directly can also get involved. Those with sufficient resources may choose to bring proxy voting and shareholder engagement in house. Others with separately managed accounts may establish proxy voting guidelines for managers who are voting on their behalf. All can raise questions with their asset managers about how issues of diversity are addressed through portfolio selection, proxy voting and corporate monitoring, and even use these as part of the overall criteria for manager selection and retention.

FA Magazine, May 11: Cornerstone Capital Group’s John Wilson writes, “Do efforts to bring greater diversity to company boards still matter? Some advocates for greater equality in corporations say investors should turn their attention away from “counting women and people of color” to addressing problems that directly affect people’s lives, such as sexual harassment, pay disparities and work/life balance…” Read John’s full article here.



On April 18, Cornerstone Capital Founder and CEO Erika Karp delivered a “TED”-style talk at Big Path Capital’s Impact Capitalism Summit, held in Chicago. She spoke on the unprecedented confluence of trends driving the integration of environmental, social and governance considerations into the analysis of investment opportunities. In the video, Erika states her belief that investment professionals who do not systematically incorporate such considerations into their investment decisionmaking process are “breaking a fiduciary duty and should not be in the market.”

FA Online, April 26: Cornerstone’s Head of Impact Strategy, Katherine Pease, published this editorial regarding sexual and gender-based violence.

This editorial was originally published in FA Online, April 26, 2018.

There was a time when I regularly quoted a well-known statistic that one third of women and girls experience sexual assault from an unknown or known perpetrator in their lifetimes. At the time, that percentage seemed pretty high. And then #metoo happened. The more I heard stories from women—personal stories or stories circulated through social media and then the mainstream media—the more I realized that it was the rare woman or transgender person who I knew or knew of who hadn’t experienced sexual or gender-based violence.

So here we are, in a time where social media has finally made evident the extent of the problem. How did we get here? How is it that the systematic cover-up of violence and abuse in society and in companies is so pervasive?

In a recent article published by Cornerstone Capital Group (where I work), my colleagues Emma Currier and Sebastian Vanderzeil noted that sexual and gender-based violence may present a material risk to companies and industries in three key areas:

Simply put, violence and harassment in the workplace is bad for business. When allowed to run rampant, it can lead to greater turnover and lower performance. It can also create tension with the communities in which businesses work when management is perceived to be complicit with perpetrators and noncompliant with local customs and laws. And, as we have seen with the Weinstein empire and others, when it comes to companies that fail to create inclusive cultures and address harassment, consumers are quick to abandon brands, a phenomenon that is growing thanks to the prevalence of social media.

But there is something that can be done. Shareholders and investors can insist that the companies in which they are invested disclose critical information that will bring to light corporate practices and cultures related to sexual and gender-based violence. Unfortunately, this is easier said than done due to the current state of reporting by companies on matters related to an array of issues that are important to women and others who experience marginalization. Consistent with broader corporate negligence around gender equality, there is a serious gap in corporate reporting on sexual harassment and violence, a gap that currently makes it very difficult to evaluate corporate behavior.

Given this urgent need for more disclosure, In the short run, investors should demand that companies disclose:

  1. Sexual harassment claims and companies’ specific steps to resolve the claims
  2. Initiatives to support victims in reporting sexual and gender-based violence

A handful investors are already taking significant steps toward aligning their investments with companies that disclose their practices related to equity and opportunity in the workplace. This is being made possible in part because of new efforts to systematically improve disclosure and reporting practices among corporations. For example, EquiLeap, an Amsterdam-based organization, measures gender equality in public companies against an extensive proprietary Equileap Gender Equality Scorecard, which looks at 19 different data points, including recruitment, training and promotion, the gender composition of management and workforce (gender balance being the ideal), fair wages and equal pay, family leave policies, work-life balance and supply chains. It also includes alarm bells to mark, and if necessary, to exclude companies that have cases taken against them or have been judged to be guilty of gender discrimination and/or harassment. The Equileap Scorecard is inspired by the UN’s Women’s Empowerment Principles, and looks at the workplace from a rights-based perspective rather than purely from a diversity prospective, which most gender-lens investment strategies focus on.

At Cornerstone Capital Group, we are also embedding a robust gender analysis into our investment review process given our clients’ interest in gender lens investing approaches that reflect their values and indeed that have the ability to change how corporations behave.

But we can’t do it alone or even with the limited number of investors who are committed to gender lens investing. We will only be successful in making the needed change that #metoo has given voice to if many more investors ask hard questions of their investment managers and the companies in which they are invested. Collectively we must demand more of companies and we must act to ensure that they take the basic step of disclosing the information that investors need to make informed decisions. Because if not now, when?

Katherine Pease is Managing Director and Head of Impact Strat

The recent field assistance bulletin by the U.S. Department of Labor, which asserts that under ERISA “fiduciaries must not too readily treat ESG factors as economically relevant…” demonstrates a lack of awareness of what constitutes economic relevance. The bulletin does not rescind any portion of the 2015-2016 guidance, which we wrote about at the time, and thus has little practical impact. It appears to be simply an effort to chip away at progressive Obama-era policies.

In line with responses to similar efforts to dismantle or weaken public policy that supports widely accepted environmental, social and governance principles, leading organizations in both the corporate and financial sector will maintain momentum toward consideration of all material factors that contribute to sustainable long-term financial performance, including the environmental and social impacts of their business activities and investment decisions. Indeed, we believe that investment advisors that do not incorporate the discipline of ESG analysis into investment decisions are shirking their fiduciary responsibilities to their clients.

Upcoming Event:

Citizen activists are taking to the streets to demand government accountability and action on issues they care about passionately, with groups ranging from #metoo to #neveragain, Black Lives Matter, and the alt-right. Against this backdrop, some of the largest shareholders in the world are now joining long-time shareholder advocates to call for improved corporate governance, equality and environmental stewardship. How will this heightened partisanship and conflict affect relations between companies and shareholders?

Join Cornerstone Capital Group as we convene our panel of corporate governance experts to discuss hot topics in corporate accountability, sustainability and shareholder engagement, addressing questions such as:

April 17, 2018

11:00 am – 12:00 pm

Register here

Executive summary:

The language of impact. At Cornerstone Capital Group, we apply the discipline of environmental, social and governance (ESG) analysis along with financial analysis in assessing investment opportunities designed to help our clients achieve positive impact – the societal and environmental change resulting from investment decisions. Our overarching objective as a firm is sustainability, which we define as “the relentless pursuit of material progress towards a more regenerative and inclusive society.” In this report we use ESG in discussing issues and investment strategies, and “impact-driven investing” when “investing for impact” would be cumbersome. We use “sustainable” or “sustainability” when referring to broad concepts.

Why invest for impact? A growing number of investors wish to integrate their investing activities with the values that inform the rest of their lives or their organizational missions. They want to invest in ways that pay heed to both their financial priorities and their commitment to environmental or social issues. Some investors believe that doing so will grant them a financial edge in the marketplace. Others wish to influence the direction of the economy because they see their own futures as inexorably linked to the future health and prosperity of the world.

Why is this trend becoming more mainstream now? Increasing demand for impact-oriented investments is being driven by a “perfect storm” of factors. The global financial crisis of 2007-08, the Deepwater Horizon disaster and other events have made investors increasing conscious of the systemic risks facing their portfolios. Beyond financial instability and the risk of industrial accidents, these risks include climate change, globalization, and inequality. Also, technology is driving greater transparency and accountability for companies, even as more of their value is tied to intangible factors that are becoming harder to measure through traditional financial analysis.

Key players. Today, the sustainability ecosystem includes some of the most sophisticated investment organizations in the market, as well as professional associations, data providers and others that can help investors invest for impact. With the help of a financial advisor who possesses the right expertise, investors can select the optimal mix of strategies designed to achieve both financial and impact objectives.

ESG-focused investing strategies and financial performance. Traditionally, the mainstream financial world has claimed that ESG-focused strategies would underperform their more traditional counterparts. However, experience and research have shown that these investments offer competitive returns. Recently, evidence has emerged that attention to ESG concerns may help both investors and companies mitigate risk and, in some cases, boost performance. Of course, investors may differ in the societal values that they bring to the market, just as they have differing risk tolerance and time horizons. Numerous strategies have evolved to help investors integrate their values into their investment portfolios. The best-known strategy, screening (positive or negative), remains important, but investors seeking social impact may also choose strategies such as active ownership, ESG integration or thematic investing.

Download our report here.


Even as stock price volatility has increased in 2018, the U.S. equity outlook remains fundamentally sound.  Strength in corporate profitability is broad-based, with nine of the eleven sectors in the S&P 500 currently forecast to post double-digit earnings gains this year.

There are risks to our outlook: potential interest rate increases; wage pressures; trade tensions; geopolitical conflicts; domestic political upheaval. We also consider risks that might arise from environmental, social or governance factors, particularly for the technology and finance sectors.

While acknowledging these risks, our 2018 equity outlook remains unchanged. We continue to believe that strength in corporate profits will offset any pressures on P/E multiples, so that stock prices are likely to end 2018 with gains of 5-10%.

Read our full analysis here.

Michael Geraghty is the Equity Strategist at Cornerstone Capital Group. He has over three decades of experience in the financial services industry.  Michael has worked as an investment strategist at a number of leading firms.  At PaineWebber (1988 – 2000), he was a Senior Vice President and member of an Institutional Investor ranked U.S. Portfolio Strategy team.  At UBS (2000 – 2003), he was an Executive Director and senior member of the global equity strategy team responsible for regional and sector allocations.  At Citi Investment Research & Analysis (2004 – 2012), Michael was the global themes strategist; Citi was ranked #1 for Thematic Research in the 2011 Extel survey.  Michael holds a Master’s degree in Economics and a Masters of Business Administration in Finance from Columbia University.

In conjunction with the recent CEO Investor Forum hosted by CECP, a CEO-led coalition that believes a company’s social strategy determines company success, the organization’s Strategic Investors Initiative (SII) issued an open letter to its members providing guidance on engaging with long-term investors. The guidance is intended to steer CEOs toward greater emphasis on long-term goals and strategies, in an effort to combat the excessive focus on short-term quarterly performance that permeates the current landscape. The letter was signed by a number of corporate leaders, including Cornerstone’s CEO, Erika Karp. Download the letter here.

U.S. Special Counsel Robert Mueller’s recent indictment of 13 Russians for violations of US campaign laws highlights just how broken the U.S. election finance system has become. It illustrates that the public cannot expect to be able to evaluate all the agendas that lie behind election spending, the truthfulness of content, or the legitimacy of the “dark money” that currently dominates campaign finance.

Beginning at least as early as 2014, a Russian organization called the Internet Research Agency (IRA) appears to have violated laws prohibiting election spending by foreign nationals by purchasing ads on social media sites, paying U.S. nationals to engage in political activities, and making other expenditures designed to influence the outcome of the 2016 Presidential election. Such a scheme could flourish for years only because of the general opaqueness of the U.S. campaign finance system. Because U.S. election law allows legitimate donors to avoid disclosure by funneling some political spending through intermediaries, U.S. voters are typically not aware of the funding source of political advocacy efforts.  Transparency advocates argue that this undermines free and fair elections by concealing the possible motivations and agendas of donors.  But emerging details of Russian interference in U.S. elections also shows how this system can pose an even greater threat to national security by covering up illegal activity by foreign agents whose agenda is contrary to US national interests.

An ineffective system…

U.S. campaign finance laws have generally grown laxer over the last decade.  In a series of decisions, most notably the 2010 Citizens United v. FEC decision, the Supreme Court has struck down many limitations on campaign finance for individuals and corporations, while endorsing – but not requiring – greater transparency of political contributions.

In the absence of outright limits, a system of transparency creates accountability of donors to the public and makes illegal donations more difficult to conceal.  However, Congress has shown little political will to act on the Court’s recommendations, leaving a system that fails either to effectively limit election spending or to establish accountability for donors.

Currently, U.S. corporations cannot donate directly to political campaigns. They can instead make indirect contributions to trade associations or “social welfare” organizations for political purposes without disclosing these contributions, as long as these contributions are not coordinated with the campaigns of political candidates.  This substantial loophole has increased the influence of money in US elections.

…Leaves the task to advocates

In the absence of comprehensive campaign finance disclosure rules, advocates are making efforts to encourage disclosure where possible, as a means of raising public expectations of transparency.  Many shareholders of public companies now consider oversight and disclosure of election expenditures to be a necessary part of good corporate governance. They have begun to ask companies to voluntarily disclose all election spending, arguing that oversight is necessary to ensure that funds are spent in shareholder interests, as opposed to advancing the political views or interests of company executives.  Advocates have also pointed to the example of companies whose donations have caused embarrassment when revealed, because they were perceived as contrary to the companies’ own expressed policy views.

According to the Center for Political Accountability, shareholders have engaged over 175 companies, of which 83 have adopted model guidelines for disclosure while approximately 200 others have adopted some form of disclosure and board oversight of political spending.  In 2017, approximately 100 shareholder proposals were filed on this topic, and voting support for most of these proposals typically exceeds 40%, which demonstrates substantial support among shareholders.

Voluntary corporate disclosure of political contributions will not be sufficient to bring transparency to the campaign finance system, because a significant portion of campaign finance comes from private companies, individuals and families, and because the public corporations with high or controversial electoral participation may have the most incentive to resist full disclosure.  Nevertheless, the success of shareholder efforts helps to build support for eventual comprehensive disclosure laws by creating social expectations for transparency and countering arguments that disclosure is impractical or risky.

The Role of Asset Owners

While there is no way to know how much influence Russian interference had on the outcome of the 2016 U.S.  Presidential election, they did succeed in reaching millions of people and mobilizing thousands to take action in what they believed to be legitimate domestic political events.  The Mueller indictment may at least hamper the IRA’s future efforts by shining a light on its methods, and perhaps by spurring greater regulation of social media advertising.  But a model for disrupting US election has now been established.   Until all election finance can be traced back to its source, there is no guarantee that another hostile power could not use a similar roadmap to disrupt future elections.

Increased corporate transparency could make such schemes more difficult to conceal by establishing generalized expectations of transparency by all actors. The role of investors is to influence the corporations and financial markets toward support for this outcome.  Specific steps may include:

All citizens have an interest in living in a robust democracy, and investors have a specific interest in the role that democracy plays in ensuring market stability, respect for property rights, and broadly shared economic growth.

John K.S. Wilson is the Head of Research and Corporate Governance at Cornerstone Capital Group. He leads a multidisciplinary team that publishes investment research integrating Environmental, Social and Governance (ESG) issues into thematic equity research and manager due diligence. He writes and presents widely about the relevance of corporate governance and sustainability to investment performance for academic, foundations, corporate and investor audiences.