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:

  • For investors with explicit proxy voting policies, specify that managers should support reasonable proposals asking for full corporate disclosure of all political contributions and lobbying expenses;
  • For investors in public equity funds, ask asset managers whether they consider political disclosure to be relevant in their evaluation of corporate governance of portfolio companies;
  • Review asset managers’ proxy voting records to determine whether they have consistently supported resolutions asking for greater political disclosures and, if not, to explain why they do not.

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.