Why Investors Should Favor Political-Spending Disclosures

When 2010's Citizens United ruling expanded the scope of corporate political spending protected by the U.S. Constitution, the Supreme Court partially justified its argument by stating that investors could hold corporations accountable for their political-spending choices.

Unfortunately, investors just don't have the ability to do that, because corporations are not required to disclose their political spending to shareholders. But a proposed Securities and Exchange Commission rule change could help fix this problem.

The SEC is considering a rule called "Disclosure Regarding the Use of Corporate Resources for Political Activities" that would require public companies to disclose their political spending to shareholders. Such a rule would be good for investors for at least three reasons:

  • It would put investors in a better position to determine whether their capital is spent on legitimate business interests or to promote the personal politics of directors and execs.
  • It would provide investors with information they could use to evaluate whether political expenditures made in good faith are actually in the best interests of the business.
  • It would supply information that would help socially conscious investors make decisions that are values-based as well as profit-based.

Managing conflicts of interest
Unless corporations are required to disclose political spending to investors, there is tremendous potential for conflicts of interest. It creates the opportunity for business leaders to funnel shareholder capital into political initiatives that advance their personal political agendas, which may not be aligned with the best interests of the business.

It's not hard to find areas where business leaders might be tempted to use company dollars to support political agendas that may not benefit shareholders. For example, many corporate directors and executives oppose legislation that enhances shareholder rights, and they may be tempted to use shareholder dollars to fund political spending that opposes such legislation.

"Say on pay" legislation was passed in 2010. But in a 2009 survey of 31 CEOs of large companies, USA Today found that 77% opposed the legislation. While some company leaders offered business-related arguments against giving shareholders a nonbinding vote on executive pay, their personal interest in protecting their own salaries should give investors cause for concern.

For example, Kayak Software (UNKNOWN: KYAK.DL  ) CEO Steve Hafner openly spoke out against the regulation, saying, "I wonder if the congressmen backing this legislation would propose similar laws governing their own compensation" -- an objection that says nothing about whether this regulation is good for investors.

It's possible that these leaders would never use shareholder money to fight legislation like this. But mandatory disclosures of political spending would put shareholders in a better position to verify that business leaders are truly representing their interests.

Evaluating management decisions
Even if the interests of directors and executives were always aligned with those of shareholders, there can be reasonable disagreement about how corporate funds should be spent. Greater transparency regarding political spending would help investors to determine whether company-funded initiatives are in the best interest of the business and to gauge the risks associated with certain political contributions.

Target (NYSE: TGT  ) shareholders may have welcomed the opportunity to gauge the risk associated with that company's donations to MN Forward, which supported notoriously anti-gay-rights politician Tom Emmer before the information became public and led to boycotts and public outrage.

Even experts frequently disagree about the impact new regulations might have on a company's bottom line. While some have argued that health care reforms such as Obamacare would be bad for health insurers, others have argued that it would boost their profits by putting more people on the rolls. Increased transparency in political spending would help investors understand the strategies of the companies they own or are interested in and use that information to guide their investment decisions.

Empowering socially conscious investors
Some investors are motivated not solely by the potential for profit, but by ethics as well. They may not wish to invest in companies that spend corporate money to oppose stricter environmental legislation or that favor laws some see as corrosive to society.

For example, several activist groups criticized businesses with financial ties to the American Legislative Exchange Council due to its involvement in pushing "stand your ground" laws, which allow people to use force when they have a reasonable belief there is an unlawful threat and impose no obligation to retreat when possible. ALEC also came under fire for its involvement in pushing voter ID laws, which some argue suppress minority voters.

These controversial initiatives put political pressure on companies such as Coca-Cola (NYSE: KO  ) and PepsiCo (NYSE: PEP  ) to cut ties with the organization last year. After Coke ended its partnership with ALEC, Coke spokesperson Diana Garza Ciarlante pointed out the company's long-standing policy to take a stand only on issues that directly affect the company and its industry, stating that Coke's affiliation with ALEC was largely related to its efforts in opposing discriminatory food and beverage taxes. Pepsi's vice president of public policy and government affairs, Paul Boykas, offered a similar explanation of his company's affiliation with ALEC after canceling its membership.

These statements may help explain some of the political-spending choices made by Coke and Pepsi. However, ethically driven investors may still want to know about these political expenditures before a scandal arises so they can determine whether they're comfortable with the use of their investment dollars.

The Foolish bottom line
The SEC plans to issue a Notice of Proposed Rulemaking on the proposed disclosure rule by April. While the future of the rule is uncertain, if it passes, shareholders won't have to rely on the scattered and incomplete information provided by activists and journalists. Instead, they'll be able to make decisions based on a more complete set of information about how corporations conduct themselves as they seek to grow profits.

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