By Bruce F. Freed and Karl J. Sandstrom

How Dark Money Is Distorting Politics and Undermining Democracy

How Dark Money Is Distorting Politics by Bruce F. Freed and Karl J. Sandstrom

February 24th, 2015

The Supreme Court’s 2010 Citizens United decision and subsequent court rulings deregulating political spending have greatly increased the influence of corporate special interests. Today, corporations are among the leading underwriters of Washington politics and a dominant force shaping its policy-making. Long gone are the days when unions and government could balance the impact of corporations.

At the same time, a large swath of political spending has gone underground. Prior to Citizens United, election spending by companies, unions and individuals was subject to limits and carried out with disclosure of donors. Post-Citizens United, the limits are gone for corporations. Donor secrecy reigns. Corporations can spend to influence elections directly, or indirectly through trade associations or so-called “social welfare” organizations as long as these groups don’t coordinate with a political candidate. The result is significant growth in “dark money” influence.

When “dark money” surges and corporate sub rosa influence grows, how can corporate executives, shareholders, citizens and decision-makers best address the resulting risks and challenges? We believe our democracy works best when companies and organizations pressing to advocate their interests can compete on a level playing field and when “dark money” is brought into the sunlight.

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It’s true that Unions can engage in hidden spending too. Tax exempt membership organizations on the left and right with big bucks can also support their agendas with dark money. But the resources that companies can tap dwarf those of unions and other non-profits. By one measure, corporate PACs spent $309.2 million in the 2011-2012 election cycle, compared to $60.5 million for union PACs, according to the Center for Responsive Politics. By another, ExxonMobil’s PAC raised $1.8 million in 2011-2012 a mere fraction of their $86 billion in profits that year– 300 times the total raised by all corporate PACs. The point is, ExxonMobil need use only a fraction of its corporate funds to seek a favorable political outcome.

Meanwhile, spending by “dark money” political groups has more than quadrupled from $69 million in 2007-08 to $308.7 million in 2011-12. These groups typically are trade associations and 501(c)(4) “social welfare” groups that receive money anonymously and spend it as they choose. Their growth has enabled increased corporate outsourcing of political spending, when companies turn over important decisions to third-party groups.

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How have these campaign finance shifts reshaped Washington policy-making and politics? Because so much activity is veiled, the answer is not yet well defined. Yet it appears that increasingly, policy battles are more likely to play out between industries or between companies – as opposed to pitting unions, other interest groups and businesses against one another:

• In the face-off over “net neutrality,” content providers (Google and Netflix) are aligned against Internet service providers (Comcast, Verizon and AT&T).

• The battle over forcing Internet retailers to collect sales taxes pits online companies against brick-and-mortar companies.

• In an earlier phase of the fight over credit card swipe fees, merchants lined up against credit card companies.
At the state level, the same dynamic has unfolded in a fight over electricity generation. In Arizona, mainline generating companies have mounted an attack to block the solar industry from challenging them as the source of power for homeowners.

In these battles, political spending is a key weapon. As NPR reporter Peter Overby observed about the solar-versus-mainline utility fight, “Sometimes the rivalry looks more like hardball politics than marketplace economics.” Another weapon is the use of pressure tactics by nonprofit groups. A Washington consultant who promoted a “win ugly or lose pretty” ethic to a closed-door industry audience confided that all campaigns are now run through nonprofits for the express purpose of avoiding the requirement that donors be named, according to The New York Times,.

When political spending goes underground, what are the dangers? It poses risks for distorting markets, harming competition and exposing companies to the threat of extortion by powerful political figures.

When donations are hidden, a politician can quietly shake down a company. Forty-one years ago, as part of the Watergate scandal, 12 corporations and 17 corporate executives were indicted or pleaded guilty, mainly to charges of making illegal campaign contributions. It is not unreasonable to fear a reprise.

There is also a danger that when a company “outsources” its political spending, the money will go for purposes that conflict with its values. In 2009-10, the U.S. Chamber of Commerce — a major trade association — spent money from companies that supported action to tackle climate change in order to oppose those very actions. In Montana, dark money helped a Democrat keep a key Senate seat according to an investigation by ProPublica. And CNN reported in 2012 that Aetna gave millions to a 501(c)(4) that assailed lawmakers voting for the Affordable Care Act, although Aetna’s president had voiced support for it.

This kind of political spending can bring public embarrassment for a company. In 2012, Bloomberg reported that the Pharmaceutical Research and Manufacturers of America had helped underwrite the election of congressional candidates who opposed access to contraceptives sold by its members. Contributions from leading contraceptive manufacturers ultimately flew in the face of company product lines and values.

The Solution

Congress could pass legislation requiring full disclosure by companies and unions of significant election-related spending, including payments to trade associations and (501)(c)(4) groups. To succeed, any legislation must require that donors making substantial contributions report them independently of the disclosures required of recipients.

Securities and Exchange Commission Chair Mary Jo White should get behind a rule mandating that public companies disclose their political spending with treasury funds, and the SEC should adopt it. This action would make corporate political disclosure universal and uniform. It would also press private companies to follow suit.

Lastly, political disclosure ought to become a standard measure of corporate governance. Today, many leading U.S. public companies recognize the risks that can accompany secret political spending. They are already accepting transparency as a standard of good corporate governance and are practicing it in the areas of privacy, supply chain management, environmental protection and executive compensation.

In recent years, 130 companies have decided to allow sunlight on their political spending by adopting a model disclosure resolution. According to the 2014 CPA-Zicklin Index, a benchmarking study of the top 300 companies in the S&P 500, 60 percent are disclosing voluntarily at least some political spending made to candidates, parties and political committees. Almost half have opened up about payments made to trade associations, and a third about payments to “social welfare” organizations.

It is little known, but quite promising, that leading public companies already are standing up for transparency and also for corporate accountability. At a time of a new politics in Washington, these actions are critical for bringing sunlight to spending and its under-the-table influence on U.S. politics and policy-making.

Bruce F. Freed is president of the Center for Political Accountability. Karl J. Sandstrom is the Center for Political Accountability’s counsel and a former vice chair of the Federal Election Commission.