The 2014 mid-term elections are just a few weeks away, and this election season has already seen record amounts of money coming in from groups including trade associations, political action committees, and 527 and 501(c) tax-exempt political advocacy groups. These so-called "dark money" non-profit groups, which aren't required to disclose their funding sources, have kicked more than $85 million into this election cycle, with the total expected to rise dramatically between now and Election Day.
On Sept. 24, the Center for Political Accountability, along with the Zicklin Center for Business Ethics Research at the University of Pennsylvania's Wharton School of Business, released its annual Index of Corporate Political Disclosure and Accountability, which looks at how companies do in voluntarily disclosing the details of their political spending. [Click here to download the full report.] It's a polarizing piece of reportage in the business community, with some experts welcoming voluntary disclosures and others, such as the U.S. Chamber of Commerce, contending that the report and the group behind it are anti-business.
Regardless of the range of opinions on the CPA-Zicklin Index, there's no doubt that corporate spending in politics has increased dramatically since the Citizens United v. FEC Supreme Court decision in 2010 removed previous campaign-finance restrictions. Following the money from companies to campaigns, when possible, is instructive for the electorate and for investors. The CPA-Zicklin Index rated the top 300 companies from the S&P 500 on 24 criteria and found that these companies are, by and large, trending toward some degree of voluntary disclosure of their political contributions. (These optional disclosures are separate from the legally required disclosure of lobbying efforts and funding.)
We looked at the disclosure practices of five of the top 20 companies on this year's CPA-Zicklin Index -- Microsoft (NASDAQ:MSFT), Intel (NASDAQ:INTC), Time Warner (NYSE:TWX), Merck (NYSE:MRK), and United Parcel Service (NYSE:UPS) -- to get a sense of why companies might embrace political transparency and what it can mean for investors.
Transparency fosters shareholder trust
There are two aspects to the shareholder accountability issue, although typically the focus (especially true of voluntary-transparency opponents) is on activist shareholders who are more interested in forcing policy changes than in their return on investment. But it's also true that some investors, especially institutional investors managing socially conscious funds, like having a company's political spending laid out so they can decide whether and how much to invest in that enterprise.
Another point in favor of disclosure is that it lets the company demonstrate that it spends wisely on politics. UPS, which scored 94.3% on the Index out of a possible 100, presents its political information in the investor relations portion of its web site, which makes sense. Any company's political spending decisions have the potential to affect financial performance. If, for instance, a company spends its advocacy dollars according to executives' personal politics rather than what's best for the business, that's relevant to investors.
Transparency is trendy -- and probably inevitable
From customer-service call-outs on Twitter to social media reviews of corporate benefits to employees, detailed company information is, increasingly, real-time public information. Chipmaker Intel, which scored 91.4% on the Index, extends that ethos to its political policies. "Intel has a culture of transparency," Peter Cleveland, vice president of global public policy, told The Motley Fool via email. "We operate a bi-partisan PAC and are proud of the way we engage in the public sector. Our stakeholders – from investors to employees – want to see how we spend to advance innovation policy critical to Intel's business."
As companies become more accustomed to sharing their information online and on social media, political transparency may come to seem like a given, even though it's not required.
Disclosure avoids the appearance of conflicts of interest
When it comes to brand management, an ounce of prevention is worth about a ton of cure, especially in relation to politics, where conspiracy theories and urban legends go not to die but to resurface again and again. (For example, a baseless rumor that a major consumer products maker donates money to the Church of Satan has been floating around the Internet since at least 1998. It was debunked as recently as 2013 on Snopes.com, because these things just don't go away.) The proper vetting of political expenses through oversight committees and the clear detailing of the process make it easier for companies to justify donations to tax-exempt groups, PACs, and trade associations.
Microsoft earned a 92.9% rating on this year's Index, and its political engagement web page offers a vast amount of data to the public, most of it formatted for easy downloading and printing. Among the information Microsoft voluntarily discloses is a graph of the company's federal and state advocacy spending over time; the purposes, recipients, and donation amounts of its PAC; corporate contributions; and trade association memberships. The names of steering committee members, the company's public policy agenda, and its principles for engagement are also on the site.
Merck, meanwhile, spells out its policy positions clearly on its site and explains how they relate to the company's business interests. Merck takes the unusual step of addressing the Citizens United ruling specifically, in a link to its public policy position statement. The company earned a 90% on the Index this year. Time Warner, which also scored 90%, has a political activities page on its site that outlines the company's contribution policies and provides links to corporate political contributions, PAC donations, and trade association spending reports.
The bottom line: These companies consider political transparency good business
None of these companies are newbies, and with age comes (presumably) wisdom. Maintaining a high level of disclosure involves time, effort, and money that these companies are willing to spend. Their voluntary disclosures foster investor trust, align with their other transparency practices, and forestall criticism based on speculation rather than facts, all of which are smart moves.
Casey Kelly Barton has no position in any stocks mentioned. The Motley Fool recommends Intel and United Parcel Service. The Motley Fool owns shares of Intel and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.