Luigi Zingales: We need not only more disclosure, but also more work in alerting people in general (and students in particular) about the distortive effects of lobbying and the extent to which it takes place.
Editor’s note: This article was first published in April 2016. We are re-publishing it as part of our series on the shareholder-stakeholder debate, marking the 50-year anniversary of Milton Friedman’s influential NYT piece on the social responsibility of business. Read previous installments here.
“To petition the Government for a redress of grievances” is a right inscribed in the First Amendment of the US Constitution. This right equally belongs to individuals, organizations, and corporations. Thus, a CEO has the right to use corporate resources to petition the government for a redress of any grievance her company might have. But does this right translate into an obligation? Does a CEO have a duty to lobby? Does this obligation follow from the shareholder value maximization principle, as Larry Fink seems to suggest in the Davos debate reported here?
If we limit ourselves to describing what businesses do (what we call positive economics), then the answer is obvious. Most CEOs lobby heavily. Not only do they do it, their main investors tell them to do so, as confirmed here by Larry Fink, CEO of Blackrock and one of the largest institutional investors in the world. They lobby not just to redress grievances, but to shape the rules of the game to their own advantage. Alphabet (Google) is not a regulated company (at least in the classical sense of the word), but it is one of the companies spending the most on lobbying. Why? Not only to defend the right to use the massive data it collects, but also to proactively shape the business environment in its favor. Whether one supports “net neutrality” or opposes it, they have to agree that net neutrality greatly favors Google, which fears being charged directly for the massive internet use it generates, while it penalizes telecom companies, which cannot price-discriminate to recover the fixed costs of the network they build. Not surprisingly, Google lobbies very heavily in favor of net neutrality, while telecom companies lobby against it.
When economic giants fight among themselves, not only does the right to lobby fulfill a constitutional right, it is also efficient. This is what Nobel Prize winner (and late University of Chicago professor) Gary Becker thought: competition among lobbies leads to efficient outcomes 1. Yet, for this result to be true two conditions need to be fulfilled. First, the different interests (or view points) should have equal ability to organize and finance their lobbying effort. As Mancur Olson (a Maryland economist who died too young to win the Nobel Prize) wrote, dispersed interests face a bigger hurdle in getting organized 2. Thus, citizens interested in clean water have a harder time lobbying Congress than chemical companies who pollute it (see the DuPont case described here). Second, lobbying is efficient if it is entirely dedicated to providing information to the legislator. While some lobbying certainly performs this role, not all of it does, as shown in this paper. If lobbying is (mostly?) about influencing rather than about informing, then it is a tantamount to an arms race, which leads to inefficient outcomes with too much lobbying 3.
Thus, under realistic conditions lobbying tends to be excessive from a social point of view: not only does it waste resources, but also might lead to the wrong decisions—favoring the strongest player, not necessarily the one with the most valid claim. If this is the case, then there cannot be an economic duty to lobby, at least not one based on sound economic principles, since this prescription would lead to outcomes that are inefficient.
This conclusion seems to contradict the traditional theory of the firm. If the goal of a CEO should be to maximize long-term shareholder value and lobbying does produce this outcome (see for example), for evidence that lobbying firms have higher returns), why shouldn’t CEOs do so? Yet, in the famous piece where he advocates that firms should have a single-focused goal of maximizing shareholder value, Milton Friedman was very careful in stating the assumption that “the basic rules of the game” were off limits to firms. Thus, implicitly even Milton Friedman recognized that—when lobbying is present and effective—his prescription does not necessarily hold.
Then, the question is not whether firms have a duty to lobby but whether from an economic point of view the cost of putting restrictions on firms’ lobbying activity (if this were constitutionally allowed) is superior to the potential benefits of these restrictions, with the understanding that–left to themselves—firms will lobby aggressively and probably lobby too much. Some people (including my colleague and friend Steve Kaplan) think that lobbying activity is a minor and inconsequential part of firms’ activity. Thus, it is not worth changing our prescription for it. This belief is certainly supported by the absolute value of the amount spent in lobbying. Alphabet, a company with a $515 billion in stock market capitalization, spends only $17 million a year in lobbying. Why should this be such a big deal?
Yet, this conclusion relies heavily on a very narrow definition of lobbying. In reality, the amount of resources most firms spend in influencing public policy is much larger. It includes a big chunk of the advertising many firms do—otherwise, why would many firms with no consumer products, like ADM, engage in massive advertising? It also includes a lot of philanthropy, like many oil companies do to acquire brownie points with local communities in case of an oil spill. It includes also campaign donations and all the time and resources companies dedicate to help political candidates. During the last presidential election, Google CEO Eric Schmidt offered technological help to the Obama campaign. Is it just a coincidence that the FTC commission appointed by his administration decided not to proceed with an antitrust case against Google, in spite of the favorable opinion of the FTC’s research department?
If the definition of lobbying is broadened and the consequences are potentially so ominous, it is neither minor nor inconsequential. And if this were the case, it would be hard to argue that consumers can offset Google’s lobbying. The call for papers that the Stigler Center (in conjunction with HBS) has launched tries to answer precisely these questions and to stimulate a debate on what should be done.
In the meantime, my modest proposals (which I advanced in my 2012 book A Capitalism for the People are as follows. Even if the Constitution allowed for laws to restrict corporate lobbying (and, in the United States after Citizens United, it does not), it would be a practically impossible task to achieve. Thus, one potential remedy is to introduce a progressive tax on lobbying expenditures. The proceeds of this tax could then be used to strengthen the advocacy of public interest groups, which are poorly coordinated and poorly financed, to level the playing field. This money could then be allocated to various groups using a voucher system, along the lines of Larry Lessig’s proposal for campaign financing reform.
The second remedy is a combination of naming and shaming. Most people feel it is socially legitimate for a company to lobby to redress an injustice, like a higher tax rate that penalizes one company vis-à-vis the rest. At the same time, I suspect many people would feel uncomfortable with a company lobbying to protect an unjustified tax loophole that benefits it greatly (certainly I do). Thus, exposing excessive lobbying can play a role in mitigating it.
For this to take place, however, we need not only more disclosure, but also more work in alerting people in general (and students in particular) about the distortive effects of lobbying and the extent to which it takes place. Academia (and in particular business schools) should play a key role in this direction. This is one of the key missions of the Stigler Center.
With a clear social norm on what constitutes acceptable lobbying, the legal principles of corporate governance do not need to be changed. As I already discussed here, the American Law Institute’s principles of corporate governance states that a CEO “may take into account ethical considerations that are reasonably regarded as appropriate to the responsible conduct of business” (emphasis added). Thus, there is no way a shareholder can sue a manager for breach of her fiduciary duty if the CEO does not undertake socially inefficient lobby.
Yet, who decides what is reasonable and responsible? Once again, Academia plays a big role here. Hence the importance of the conference we are organizing on this theme.
- Becker, Gary. 1983. “A Theory of Competition Among Pressure Groups for Political Influence.” Quarterly Journal of Finance 98(3): 371-400
- Olson, Mancur. 1965. The Logic of Collective Action: Public Goods and the Theory of Groups. Cambridge: Harvard University Press
- Tullock, Gordon. 1972. “The Purchase of Politicians.” Western Economic Journal 10: 354-355.