The role of “dark money” in distorting the political process is a hotly debated topic these days, given the backdrop of the U.S. presidential election campaigns. Dark money refers to political contributions from nonprofits who don’t have to disclose who their donors are or disclose their expenditures.

Three major factors are shaping the debate. One is a recent finding that dark money represents two-thirds of the money spent on advertising in the current elections. The second is the surge in campaign spending thanks to the 2010 U.S. Supreme Court decision in the so-called Citizens United case that the First Amendment of the U.S. Constitution prohibited the government from restricting independent political expenditures by nonprofits. That protection was extended to contributions from for-profit organizations, labor unions and other organizations. The third is a leash an omnibus spending act has imposed on the Securities and Exchange Commission (SEC), preventing it from requiring publicly traded companies to disclose their political contributions.

“The term dark money came into such widespread use because it sounds sinister,” said Jill E. Fisch, professor of law at the University of Pennsylvania Law School and co-director of its Institute for Law and Economics. “[It] suggests that there is something hidden, some amount of wrongdoing.” Corporations spend huge amounts of money in politics, she pointed out. “The reason for that is politics is important to business.”

Eric Orts, Wharton professor of legal studies and business ethics, noted the two sides to the debate on disclosure of political contributions. One side calls for disclosure if large sums of money are raised to support one candidate or another, he said. The other argument is that people shouldn’t be targeted for whom they might support. Those in the second camp argue that for example, nonprofits shouldn’t be required to disclose names of their members that contribute to specific political campaigns. “On balance, it makes sense to have more disclosure for so-called dark money from business corporations.” Orts is also director of Wharton’s Initiative for Global Environmental Leadership.

Fisch and Orts discussed the arguments surrounding the debate on the Knowledge at Wharton show on Wharton Business Radio on SiriusXM channel 111. (Listen to the podcast at the top of this page.)

The Supreme Court decision in the case of the conservative group Citizens United vs. the Federal Election Commission “opened one additional door” in the debate, Fisch said. “We see money in politics continuing to grow, so people are concerned about it.”

Orts said that “a movement” is underway to bring about greater transparency into such issues. He noted that the Zicklin Center for Business Ethics Research along with the Center for Political Accountability publishes an annual report of companies that voluntarily decide to disclose their political contributions. “There is growing populist sentiment that special interests and secret moneyed elites are really calling all the shots,” wrote Charles Kolb in a foreword to the 2015 CPA-Zicklin Index of Corporate Political Disclosure and Accountability.

Follow the Money

For sure, the monies involved in the election process are staggering, going by various accounts. Campaign for Accountability has estimated that the 2016 U.S. presidential campaign may cost at least $5 billion, roughly double the $2.6 billion that the nonprofit Center for Responsive Politics estimated was spent on the 2012 campaign, according to a Reuters report.

As of May 23, 2016, candidates in the 2016 presidential elections have raised $791 million on their own and another $462 million through so-called “Super PACs” supporting them, according to (Super PACs are political action committees which can accept unlimited contributions from individuals, companies, unions and others.)

“[Dark money] groups — social welfare organizations, associations and others — which aren’t required to reveal the interests behind them … have put up more than $213 million on political ads since the start of 2015,” noted a recent Bloomberg report, citing data from Kantar Media CMAG. “The groups have promoted their views on everything from climate change to health care policy to immigration,” it added. In comparison, official campaigns and super-political action committees have spent about $114 million, Bloomberg noted.

Limits of Rule-making

Any efforts by the SEC towards campaign finance reforms will fall short of what is needed, according to Fisch. For one, the focus of the SEC’s rule-making to require disclosures of political contributions is limited to public corporations. “The lack of transparency in the political process extends well beyond public corporations,” she said. “[Also] it’s not clear if SEC-mandated disclosure is the best fix, because it is only going to get a piece of the overall puzzle.”

“On balance, it makes sense to have more disclosure for so-called dark money from business corporations.” –Eric Orts

Further, SEC regulation is tied to investors and investment questions, Fisch noted. “The concern that Eric [Orts] addressed about political transparency goes to the election process,” she said. The main issues there are around whether the election process is distorted by money, and should voters be able to track the money behind political advertising, she added.

Orts noted that the restrictions on the SEC from spending on rule-making to require disclosure of political contributions expire in September 2016. “It will be perfect timing,” he said, referring to the presidential elections that would soon follow. Incidentally, the SEC has received more than a million public comments on a 2011 rule-making petition from a group of legal professors that asked it to develop rules for disclosure of corporate political spending, according to a Wall Street Journal report of December 16, 2015.

Limits to Shareholder Rights

Taking a closer look at moves to require disclosure of political contributions by publicly traded corporations, Orts noted that executives would use their company’s money to decide what political agenda to support. “It should be for the best interests of the corporation and the shareholders,” he added. That explains the argument to call for disclosures of the contributions. At the same time, he said that many large, private organizations would not be subject to any rules the SEC might draft to address those concerns. One unintended consequence of such disclosure rules could be public corporations deciding to go private, he added.

According to Fisch, investors do not get the right to decide how their corporations spend money. “Technically, it is the corporation’s money, not the investors’ money,” she said. “Part of buying stock in a corporation means you delegate to the executives decisions about how to spend the money.” The constraint there is the executives have to spend that money “in the best interests of the corporation,” she said. “If the executive spends corporate money to further his or her political preferences, that’s stealing; that’s self-dealing,” she added, noting that laws exist to prevent those occurrences.

Corporations spend money in politics for the most part because they believe it furthers their corporate interests, said Fisch. “Shareholders don’t get to micromanage those business decisions,” she added. “Those are delegated business decisions — decisions that are made in good faith on an informed basis in the reasonable belief that they are in the best interests of the [firm].”

“The regulator has to balance the costs and benefits of imposing additional regulation.” –Jill E. Fisch

Dark Side of Disclosures
Fisch called attention to “the dark side” of rules that require disclosure of political spending. One is that it is a complex process to decide on what spending must be covered: It’s hard to draw the line at any specific area, whether it involves donations from nonprofits, or business groups, trade associations or chambers of commerce.

In that vein, Fisch noted the U.S. Chamber of Commerce spends 42% of its money on political activity, and that it “legitimately represents business interests.” Orts wanted to debate that. He pointed out that the U.S. Chamber of Commerce has adopted “a very aggressive [and] negative political point of view” on stopping climate change legislation. In fact, some companies faced pressure to leave the chamber because of that position, he noted.

Fisch also pointed out that information regarding political contributions could be misused. “I’m not sure that investors are the ones who want this information,” she said. She noted that such information would be “incredibly useful” to political opponents “tarring and feathering” candidates and their initiatives, and accusing them of receiving “big corporate money.” However, such contributions may include objectives such as furthering productivity and job growth. “The regulator has to balance the costs and benefits of imposing additional regulation.”

According to Fisch, “private ordering” could be an alternate option to rules requiring disclosures, where shareholders of companies could vote for such transparency. She noted that many such shareholder proposals have been moved, but they failed to pass because they “rarely get 25% of the votes in favor.” Large institutional investors abstain from voting on such proposals or oppose moves to force corporations to disclose their contributions, she added.