Practical analysis for investment professionals
27 June 2013

Corporate Lobbying: Can Transparency Mitigate the Risk for Investors?

Is lobbying all about greed and sleaze whereby the powerful take unfair advantage of the weak? Well, the news about lobbying does make us think so. In June, three members of the House of Lords and a member of the Parliament in the UK were accused of agreeing to do parliamentary work for payment. Such scandals are far from new. While covering this latest scandal, the BBC even posted a “History of Political Lobbying Scandals,” and similar stories have also been published for the United States (see “Congressional Lobbying Scandals: A Top Ten List“). Even though both countries have seen a host of political scandals, both are ranked in the top 20 least corrupt countries in the Corruption Perceptions Index 2012, indicating that things could be much worse in corporate lobbying in other countries.

Unsurprisingly, the usual suspects in lobbying scandals are now often large corporations and their trade associations. But can corporate lobbying be done with transparency and integrity? And what risks does corporate lobbying carry for investors? To answer such questions, we interviewed, Cristina Daverio, senior research analyst and research manager at Vigeo, a European ESG research agency, which recently published the report “Transparency and Integrity of Lobbying: A New Challenge for CSR.”

CFA Institute: How would you describe corporate lobbying? And is it common for companies to lobby?

Cristina Daverio: A simple but clear definition of lobbying is the one provided by the Lobbying Transparency and Ethics Act developed by Quebec, which defines lobbying as: “Any communication, written or oral, between a representative or an interest group and a public decision maker in order to influence decision-making.” This can take different forms, it can be a direct interaction between the lobbyist and the legislative official but also indirect: grassroots lobbying focuses on raising awareness in the general population of a particular cause, with the intention of influencing the legislative process. Companies and trade associations do lobby to bring their interests to the attention of public decision makers, which makes this as a widespread practice. To give you some numbers, total budget for lobbying activities, in the United States, was USD3.30 billion in 2012 and increased more than 100% between 1998 and 2012.

Isn’t corporate lobbying often perceived to be lacking in integrity and transparency?

The limited disclosure offered so far by companies on their lobbying practices is the reason why this is often perceived as a “negative” activity. As far as lobbying is conducted with the principles of social responsibility and according to the ethics that the company has itself publicly displayed, it is a more than welcome practice that can provide important support to the public decision-making process. This is what we call “responsible lobbying,” basing our definition on the ones suggested by organizations with experience in this field such as Transparency International France, the International Corporate Governance Network, and the Global Compact.

How is lobbying being regulated? And do you think the current regulation is effective?

Comparing the US and the European system, in the US there is a mandatory legislation — the Lobbying Disclosure Act — that provides rules on who has to register and obliges each registrant to file a quarterly report with lobbying expenses and fields of interest. However, this is still a limited disclosure for investors and stakeholders who want to appreciate the business risks associated with lobbying activities. That is why about 10 years ago, some US shareholders started to file resolutions that investors consider at corporate annual meetings, seeking to inject greater oversight, accountability, and transparency into the process. Proposals seeking to increase the disclosure or to limit companies’ lobbying or spending on political purposes increased in 2012. According to Proxy Monitor, in 2012, the number of such proposals submitted per company in the Fortune 200 was 20% higher than in 2011 and more than three times that in 2008.

On the other hand, in Europe there is a voluntary system. In 2009, a transparency register for lobbyists was created. A code of conduct is also provided to lobbyists. However, due to its voluntary nature, the register does not contain all the companies doing lobbying in Brussels, therefore providing an incomplete picture. This can explain why in Europe, stakeholders’ actions appear less addressed to individual companies but to the system. Transparency International France, as well as ALTER-EU, are among the main organizations supporting the introduction of more regulation in the system.

Give us examples of both responsible and controversial lobbying by companies?

Good practices in our view are those that ensure transparency, oversight, and responsibility in the process. They are transparent on commitments; organization; internal controls to ensure fair and responsible practices and dedicated budget; the oversight role of the board to ensure that lobbying is in line with the company interests and commitments; the dissemination of an internal culture of responsible lobbying through regular training provided to all company representatives who engage in this activity, as well as the alignment of CSR and lobbying strategies.

A good practice, in our universe, is for example the North American Dominion Resources (D), belonging to the electric and gas utilities sector. On the other side, controversial lobbying relates to practices against issues of public interest, as, for example, the claimed role of financial industry lobby in diluting two regulatory proposals designed to improve investor protection, MiFID II and Packaged Retail Investment Products.

Another example pertains to practices that are perceived as against a company’s own commitments, as shown by a recent investors initiative that has pressed Google on its membership to the business lobby group the US Chamber of Commerce. Investors claim that Google’s support for the Chamber is perceived as an implicit endorsement of controversial policies and positions that the company publicly claims to oppose, creating confusion and risks for shareholders.

Other examples of controversial practices is the building up of unfair relations with public authorities, as it is the case of a 2011 Senate investigation uncovering financial ties between Sanofi and medical groups that lobbied the US Food and Drug Administration (FDA).

Have you observed any trend in transparency and responsibility in lobbying?

Vigeo recently concluded an analysis to evaluate the status of European and North American companies in our universe in terms of responsible lobbying and, at which extent, a different legal framework can influence companies practices. We surveyed 745 companies belonging to 22 sectors.

What we observed is that despite the level of disclosure of US companies being generally high, with about 76% of them reporting on their lobbying activities against 46% of European companies, when assessing performances on key issues for responsible lobbying — as the role of the board in overseeing companies’ lobbying strategies or the dissemination of an internal culture of responsibility — important margins for improvement are noticed in European companies, as well as in US ones. It clearly appears, therefore, that a mandatory legal context, such as the one used in the United States, is not sufficient to drive a change of companies’ behavior in a more responsible sense.

How does lobbying relate to corporate social responsibility (CSR)?

In our analysis, we also assessed if good performers in terms of CSR reveal good performance in terms of responsible lobbying. But we could not find any clear link between overall CSR score and fairness and transparency in political activities. There is no visible effort to ensure the alignment of policy positions with universal principles and values. For companies that support CSR, the risk of conflict between advocacy and their social and environmental policies is therefore high, as well as the risk that the credibility of their CSR strategy can be undermined.

What is your view on lobbying as a consideration in investment decision making?

For investors, enhanced disclosures are fundamental to better appreciate the business risks associated with companies’ lobbying activities. A company that is focussed on maintaining the status quo via lobbying is perhaps sending a signal that it is not a long-term thinker ready to evolve and develop its business for the future. In addition, when resources are deployed in a way that is either corrupt or in which the primary beneficiaries are the company’s managers or individual shareholders and not the company as a whole, companies might face risks in terms of reputation and efficiency of internal processes, which could impact their financial results.


Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.

About the Author(s)
Usman Hayat, CFA

Usman Hayat writes about sustainable, responsible, and impact investing and Islamic finance. He is the lead author of "Environmental, Social, and Governance Issues in Investing: A Guide for Investment Professionals," and the literature review, "Islamic Finance: Ethics, Concepts, Practice." He is interested in online learning and has directed three e-courses for CFA Institute: "ESG-100," "Islamic Finance Quiz," and "Residual Income Equity Valuation." The other topics he writes about are macroeconomics and behavioral finance. Previously, he was a content director at CFA Institute. He is a former executive director at the Securities and Exchange Commission of Pakistan (SECP). He has experience working in securities regulation and as an independent consultant. His qualifications include the CFA charter, the FRM designation, an MBA, and an MA in Development Economics. His personal interests are reading and hiking.

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