Suppose one of your investments supports a candidate whose platform you abhor. How would you know? Without laws requiring corporate political-spending disclosures, you often won't know until a media firestorm breaks out, potentially damaging your investment.

While the SEC is considering a rule that could help fix this problem, some argue that such a rule would be against the best interests of investors because it would:

  • Involve the SEC in a political struggle that would harm its credibility and undermine its ability to carry out its true mission of protecting investors.
  • Go against the preference of most shareholders, who do not support shareholder proposals calling for such political-spending disclosures.
  • Empower special-interest groups to push their agendas at the expense of investors whose primary concern is the profitability of their investments.

Let's take a closer look at these objections and their flaws.

Political involvement vs. investor protection
Some critics argue that requiring political-spending disclosures would involve the SEC in partisan politics and compromise its true mission of protecting investors. According to these critics, those who push for disclosure requirements aren't seeking to protect investors or facilitate capital formation, but rather to limit corporations' freedom of speech by empowering activists to launch smear campaigns against companies that support candidates they oppose -- e.g., the one MoveOn.org brought against Target for contributing to the campaign of notoriously antigay politician Tom Emmer through MN Forward.

However, even if these critics are right that some proponents of corporate political-spending disclosures are motivated by partisan concerns, the rule would still fall within the SEC's mandate of protecting investors. As I've argued earlier, the proposed rule would benefit investors by helping them determine whether their capital is being spent in ways that benefit the business.

Insufficient shareholder support
Critics of disclosure requirements also point out the lack of majority support for shareholder proposals pushing for disclosure at individual companies. One critic notes that all 53 shareholder proposals in 2011 pushing for political-spending disclosures failed. Another critic pointed out that in the first half of 2012, more than 50 shareholder proposals pushing for political-spending disclosures were introduced, but none of them received majority support, earning an average 20% of votes.

Such low support, they suggest, should tell the SEC that there is no reason to require disclosures. This objection is flawed for two reasons. First, the SEC shouldn't demand disclosures based solely on investor support. A lack of support doesn't mean the information is useless. Not all investors examine every piece of information businesses make public, nor do they all understand how each piece of public information can be used to help them make better investment decisions. But that does not justify hiding that information from those who do wish to examine it.

Second, it's misleading to claim that the average support for these proposals was only 20% in an environment where institutional investors, such as mutual funds, overwhelmingly tend to side with management's voting recommendations.

And these votes may not always be in the best interest of shareholders. Some critics worry that fund managers experience tremendous conflicts of interest. They point out that fund managers may feel pressure to side with management against shareholders' best interests because they manage (or want to manage) those companies' 401(k) plans.

Some critics suggest that this conflict of interest led some fund managers to approve a controversial pay package for Lockheed Martin (LMT 1.71%) CEO Robert Stevens, who was named one of the most overpaid CEOs in the U.S. by financial research firms GMI and Obermatt. Specifically, they point out that a State Street (STT 0.45%) index fund that had approved Stevens' new incentive package was also included as one of the product offerings in Lockheed's 401(k) plan. As a result, the fund managers may have felt pressure to vote with management to maintain Lockheed as a customer.

Because mutual funds collectively hold more than one-fifth of shares in U.S. public companies, they have a significant impact on proxy vote outcomes. And when fund managers can feel a great deal of pressure to side with management against shareholders' best interests, the level of support for shareholder proposals can be skewed lower than it would be otherwise.

Empowered special-interest groups
Finally, critics express concern that political-spending disclosures will empower special-interest shareholders, such as pension funds or socially conscious mutual funds, to push their agenda at the expense of most investors. The idea seems to be this: Once political spending is disclosed, these special-interest groups will have more leverage to bully executives into cutting off donations to political candidates or organizations with platforms they don't like -- even in cases where the donation promotes an overall platform that benefits the company's bottom line.

For example, Coca-Cola's (KO 2.14%) and PepsiCo's (PEP 1.08%) affiliation with the American Legislative Exchange Council was reportedly connected with their opposition to "discriminatory food and beverage taxes." However, activists pressured these companies into cutting ties with ALEC due to its involvement in pushing voter ID laws, which some argue suppress minority voters, as well as its support of "stand your ground" laws, which allow people to use force when facing a plausibly unlawful threat and do not obligate people to retreat when possible.

According to this line of thought, shareholders shouldn't be empowered with information that would allow them to make decisions for both values-based and profit-based reasons, because that would allow the extremists motivated by values-based concerns to ruin the profit stream for the rest of us.

There are a couple of reasons this line of reasoning is flawed.

First, it ignores the fact that while investors care about money, not all investors want to maximize their returns at all costs; they are sometimes willing to forgo profit if they feel the methods of obtaining them make the world worse. This desire often motivates the socially conscious investing movement, which looks to make profitable investments in ethical companies.

Second, it suggests that a few extremists can use disclosures to direct political spending against the desires and interests of most owners. There is no reason to believe that is the case. If the majority of shareholders agree with the political-spending habits of a company, there's no reason to believe that a few special-interest investors will be able to pressure executives to change those habits.

The Foolish bottom line
The SEC plans to issue a Notice of Proposed Rulemaking on the disclosure rule by April. If the rule passes, shareholders won't have to rely on the scattered and incomplete information provided by activists and journalists to evaluate the political spending of their investments from both a profit-based and values-based perspective. 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.

So far, it seems the opinions of SEC commissioners may be divided along party lines. If this gridlock continues, the rule may not have sufficient support to pass. However, there is still time for public opinion to influence the commissioners' views before final decisions are made.