Corporate Lobbying

Corporate Lobbying

David S. Emery

For:

Professor Alan Palmiter

Sustainable Corporations

April 29, 2015

Abstract

Corporate ability to influence legislative action is one indication of the ability of legislative action to make corporations sustainable. Corporations did not view lobbying as effective until the Business Roundtable, through repeated successes, demonstrated the influence corporations could have in Washington. The most successful lobbyists and corporations have been able to exert influence ever since. Because the legal environment of lobbying in the United States requires a high degree of transparency, there is abundant lobbying data available to research. Researchers, accordingly have done multiple studies on the effectiveness of corporate lobbying, and withfew dissenters, the consensus is that corporate lobbying is effective. The return on each lobbying dollar spent ranges from a few dollars, to hundreds of dollars, depending on the methodology employed. Similarly, lobbying activity positively correlates with firm performance as measured using a variety of metrics, including a portfolio-based approach. Although corporations do not always get what they want from the government, these studies indicate that if corporations do not desire federal legislation that would make them more sustainable, it is unlikely that Congress will ever introduce such legislation.

Introduction

The term lobbying, as constrained by the scope of this paper, describes paid activity in which corporations hire lobbyists to influence the United States Congress, the executive branch, and large federal agencies.[1] Lobbyists, typically lawyers, influence legislators to ensure that Congressional action is either favorable or at least not unfavorable to their client’s corporate interests.[2]

Defining a few other common lobbying terms will facilitate understanding. Inside lobbying refers to the direct lobbying of decision makers, like congresspersons, and the people that work with them.[3] Outside lobbying refers to efforts to shift public opinion on a given issue in an indirect attempt to influence decision makers.[4]

Single issue lobbying refers to the attempted influence of a congressperson regarding a single issue of importance.[5] Multiple issue lobbies usually represent organizations or associations with diverse interests, such as unions or business associations.[6] Most corporations are considered single-issue lobbies.[7]

Corporations lobby more than any other group, although the total number of corporations that lobby in significant amounts numbers less than 300.[8] According to one source, for “every dollar spent on lobbying by labor unions and public-interest groups [combined], large corporations and their associations now spend $34. Of the 100 organizations that spend the most on lobbying, 95 consistently represent business.”[9] Corporations also lobby through organizations, including the Business Roundtable, and more prominently, the U.S. Chamber of Commerce.[10]

Although the total number of registered lobbyists is around 12,000, one analyst estimates that “the actual number of working lobbyists was close to 100,000 and the industry brings in $9 billion annually.”[11] Despite the large number of lobbyists, “those with real clout number in the dozens, and a small group of firms handles much of lobbying in terms of expenditures.”[12]

Because of the extensive regulation of lobbying, including various disclosure rules, much is known about lobbying activity.[13] Disclosure rules often mandate that the identity of the lobbying client, lobbying firm, congressperson targeted, and the amount spent.[14] Thus, there is ample corporate lobbying data to study,[15] and a variety of approaches have been used.

The effectiveness of lobbying activity, to me, indicates the extent to which corporations are able to influence government, one of the primary forces capable of forcing corporate change. Change is necessary if corporation are going to become sustainable.

History

Successful corporate lobbying did not come about until the early 1970s.[16] Before then, the prevailing corporate attitude was that government should be avoided, and hopefully government would return the favor. A corporate lawyer writing in 1971 wrote that, “As every business executive knows, few elements of American society today have as little influence in government as the American businessman, the corporation, or even the millions of corporate stockholders.”

As regulation increased in the 1960s followed by “slowing economic growth and rising wages, a community of leading CEOs formed the Business Roundtable, an organization devoted explicitly to cultivating political influence.”[17] The Roundtable is comprised of CEOs of corporations including General Electric, Walmart, Dow Chemical, ExxonMobil, AT&T, Xerox, EY, Boeing, and State Farm Insurance.[18] The successes of the Business Roundtable are well documented, and include defeating a consumer protection agency bill, defeating a full employment act, defeating a labor reform law, and successfully lowering their taxes.[19][20]

Other corporations at the urging of lobbyists slowly followed the example set by the Business Roundtable.[21] It was not until the 1990s that corporations began to embrace fully the idea that lobbying could lead to increased profitability.[22] Later in this Paper, there will be many examples of successful lobbying, including some of the novel efforts from this period.

Why Lobby?

The most obvious answer to why corporations lobby is to influence governmental policy in a way that is beneficial to their interests. During one survey of corporate lobbyists, when asked why their companies maintained a Washington office, “the top reason was ‘to protect the company against changes in government policy.’ On a one-to-seven scale, lobbyists ranked this reason at 6.2 (on average). But closely behind, at 5.7, was ‘Need to improve ability to compete by seeking favorable changes in government policy.’”[23]

In addition, various studies have shown that lobbying, when done well, presents significant return on investment (“ROI”). In fact, the only way the majority of these studies differ is in the amount of outsized returns that are possible, ranging from six dollars returned for every dollar spent to hundreds of dollars for every dollar spent. Obviously, this ROI positively impacts firm value, as another study demonstrates. All of these studies will be discussed in detail, including their methodologies. A testament to the effectiveness of lobbying, an unnamed executive is quoted as saying, “If you don’t know your senators on a first name basis, you are not doing an adequate job for your stockholders.”[24]

Legal Environment of Lobbying

The legal and regulatory environment surrounding corporate lobbying is complex, and the failure of a lobbyist to comply with the rules can result in incarcerationof up to five years or fines up to $200,000. The complexity of this area of law is evidenced by the American Bar Association Manual on the lobbying, which is over 800 pages long.[25]

Sources of lobbying law include the Lobbying Disclosure Act of 1995,[26] the McCain Feingold Act of 2002,[27]and the Honest Leadership and Open Government Actof 2007.[28] Many of these statutes have been later reformed and amended, adding to the complexity. Sources of lobbying law also include judicial decisions, including most notably the Citizens United decision.[29] In Citizens United, the Supreme Court held that “theFirst Amendmentprohibited the government from restrictingindependent political expenditures . . . ”bynonprofit corporations, for-profitcorporations,labor unionsand otherassociations.[30] Predictably, this decision has lead to increased corporate campaign spending.[31]

With rules so complex and specific, there are many loopholes.[32] According to lobbyist Gerald S. J. Cassidy, “Our profession is at a critical point where we can either embrace the constructive changes and reforms by Congress or we can seek out loopholes and continue the slippery slide into history along side the ranks of snake oil salesmen.”[33] On the same subject, Jack Abramoff, released from prison after his extensive corruption and lobbying scandal is quoted as saying, “You can't take a congressman to lunch for $25 and buy him a hamburger or a steak or something like that ... But you can take him to a fund-raising lunch and not only buy him that steak, but give him $25,000 extra and call it a fund-raiser -- and have all the same access and all the same interactions with that congressman.”[34]

Fortunately, our regulations require a high degree of transparency, such researchers can study the implications of corporate lobbying efforts and analyze the results of those efforts in a variety of ways.[35] Unfortunately, that transparency has substantial limitations. For example, Citizens United encouraged so called “spooky PACs” or “dark money” organizations.[36] These spooky PACs are political action committees that receive undisclosed contributions that they then spendto influence the outcome of elections.[37] Because corporation need not disclose their contributions, they could be spending much more than is currently known.

Studies on Corporate Lobbying

This paper will analyze and discuss studies regarding the effectiveness of corporate lobbying activity. The first paper analyzed was written by the conservative-leaning lobbyists Shapiro and Dowson in 2012.[38] In it, they argue for the effectiveness of lobbying in contrast to three recent studies suggesting that lobbying activity is harmful to shareholder value. The liberal-leaning Allison and Harkins wrote the second paper in 2014.[39] In it, they claim that for every dollar spent on influencing politics, the top lobbying corporations received $760 in federal business and support, among other things. Chen, Parsley, and Wake Forest’s own Ya-Wen Yang wrote the final paper regarding lobbying effectiveness in 2014.[40] In it, they analyze the relationship between corporate lobbying expenditures and “accounting and market measures of financial performance.”

Shapiro and Dowson: “Corporate Political Spending: Why the New Critics Are Wrong”

Shapiro and Dowson wrote their paper in response to three different studies that purported to show that lobbying was actually largely ineffective and harmful to firm performance.[41] The first study they analyzed was a 2012 study by Aggarwal and two colleagues that looked at the effects of contributions to 527 organizations and soft-money contributions (which were banned for corporations in 2002).[42] Shapiro and Dowson’s interpret Aggarwal et al. as saying that 527 contributions indicate that corporate managers are expressing personal political opinions through corporate giving, raising agency concerns.[43] Aggarwal et al. claim that for each additional dollar contributed to these organizations, the firm loses $133 in market value.[44]

Criticizing these findings, Shapiro and Dowson note that the decline in market value is difficult to trace to 527 contributions.[45] It may be that the firms that are making these contributions have agency problems, as Aggarwal et al. suggest, and this explains the decline in market value.[46]

Aggarwal et al. are never entirely clear on the link between 527 spending and a decline in market value.[47] Shapiro and Dowson also note technical issues and potential bias in Aggarwal et al.’s methodology. To Shapiro and Dowson, a definitive or reliable link between spending money on political influence and a sharp decline in market value is difficult to explain, and in fact is not explained by Aggarwal et al.[48]

In addition, Shapiro and Dowson note that Aggarwal et al. provide alternative explanations for the market declines they observed. Firms that made 527 contributions typically had below-average R&D and investment spending.[49] This may be one explanation of these firms’ lower performance, or there may be some common cause. For example, these firms may not feel inclined to invest heavily in R&D and investment if their projected future profitability is low.[50] This, in turn, may be due to the fact that “such firms [were] in industries with strong competition from imports, [and] it might well [have] be a sound business decision to contribute to a party or politicians skeptical of the trade agreements . . . that intensified that competition.”[51]

Shapiro and Dowson next criticize two studies from Harvard’s John Coates from 2010 and 2012.[52] Coates’s studies made broader claims relating not to soft-money and 527 contributions, but to PAC contributions and lobbying.[53] Like Aggarwal et al., Coates links corporate political contributions to agency problems, poor governance, and a lack of shareholder rights.[54]

Coates’s first study from 2010 was, according to Shapiro and Dowson, full of contradictory data and methodological problems.[55] For example, despite arguing that worsening corporate governance (as measured by an index of indicators) correlates with increased political activity, Coates’s own charts show that the opposite is true, a fact he never discusses.[56]

Coates’s methodological problems extend to the regression analysis he uses to attempt to establish a link between firm value and corporate political activity. One issue with Coates’s approach was his use of “relative Q” to measure firm performance.[57] Relative Q is the ratio of a firm’s market value to its book value.[58] Apparently, there is little basis for measuring a firm’s performance using such a figure as book value is merely an accounting concept, and the differences between the true value of a corporation’s assets and their book value can be substantial.[59]

Shapiro and Dowson continue by noting that politically active firms tend to be among the largest of corporations, as we have already discussed. In addition, firms that lobby tend to operate in heavily regulated industries.[60] Coates does nothing to correct for these variables.[61] According to Shapiro and Dowson, such an oversight would prevent publication in any peer-reviewed journal.[62]

Coates addresses some of these problems in his 2012 study. Ultimately, his study has the same conclusions, though slightly toned down.[63] His own updated data, however, do not support his continued conclusions, according to Shapiro and Dowson.[64] When Coates corrects for corporate size and regulated industries, “at a 95 percent level of statistical confidence, the difference in firm value between companies that lobby and those that do not may be only 1 percent.”[65] In addition, when correcting his methodological problems from the 2010 study, Coates’s data shows that firms in regulated industries have values that positively correlate with political activity.[66]

Shapiro and Dowson note that both in his 2010 and 2012 articles, “Coates acknowledges that numerous studies show that corporate political activities have paid off for companies and industries through favorable trade provisions, earmarked spending, lower taxes, and eased regulation.”[67] In addition, Coates is no stranger to the vast amount of research that contradicts his own.[68] He stands by his conclusions, however.

On a final note, in critiquing these three studies, the authors conclude that

1. Firms employ a variety of strategies to influence the political process in ways that may, or should, improve their performance and benefit their shareholders.
2. Corporate spending decisions on campaign contributions and lobbying efforts are generally made in a rational and strategic manner.
3. This political spending does not appear to systematically affect congressional voting, but it does regularly influence policymaking.
4. Corporate political activity appears to have a generally positive effect on firm value, as reflected in excess market returns.
5. The precise mechanisms that produce these positive effects remain unclear.[69]

Allison and Harkins: “Fixed Fortunes: Biggest corporate political interests spend billions, get trillions”

Allison and Harkins, working for the Sunlight Foundation, analyzed 200 for-profit corporations, “all of which had active political action committees and lobbyists in the 2008, 2010 and 2012 election cycles.”[70] They chose to analyze three years before and three years after the Citizens United decision.[71] Of the 20,500 paying clients that hired lobbyists, these 200 corporations spent 26 percent of the total amount spent.[72] They conclude that over the years covered, those 200 firms spent a total of $5.8 billion on lobbying and campaign contributions, and in return received $4.4 trillion in “federal business and support.”[73] That is $760 dollars in business and support for every $1 spent.[74] With numbers this extreme, we will certainly question the methodology employed.

The authors begin by noting that the time period covered includes shifts in political control of the House of Representatives, Senate, and White House.[75] The period also covers two stimulus bills, troop surges overseas, and massive bailouts.[76] These events certainly help begin to explain the federal business and support received by the “Fixed Fortune 200.”

The authors acknowledge that many of the Fortune 200 firms invest heavily in politics and lobbying in part because “their businesses are inextricably entwined with government . . . spending decisions.”[77] Of all of the firms in the Fortune 200, 102 received “more than 10 times what they spent on politics . . . .”[78] Of course, one immediate challenge to the methodology employed is that it is not clear how much business these corporations would have received in the absence of their lobbying activity.

Despite these shortcomings, the study goes on to mention specific benefits that have accrued to large lobbying corporations. For example, they note that Blue Cross and Blue Shield saves about $1 billion per year through a unique provision in the tax code drafted just for them: section 833.[79]