When NOT lobbying suggests a conflict of interest

“It could probably be shown by facts and figures that there is no distinctly native American criminal class except Congress,” Mark Twain famously wrote. Providing some of those facts and figures, Aaron D. Hill, Jason W. Ridge and Amy Ingram – in an article published yesterday in the Harvard Business Review – describe a growing conflict-of-interest problem in the US Congress, an important topic that these days is largely overshadowed by the COIs involving the President.

The authors set the stage by showing that there is now widespread ownership of stock by members of Congress: “the average S&P 500 firm in [their]  sample has about seven members of Congress holding its stock. Some companies have closer to 100 members holding stock, and many firms have 50 or more in a given year.” They next show that “firms where a greater percentage of lawmakers invest have significantly higher performance in the subsequent year — with each percentage of congressional membership owning stock worth about a 1% improvement in” return on assets. “This suggests  that politicians may be privy to nonpublic information about future regulatory or legislative actions that may prove helpful to these companies. It’s also possible that members of Congress use their influence to benefit the firms in which they invest. This finding dovetails with prior research that shows members of the House and Senate generate abnormally higher returns on their investments.”

Hmmm. Perhaps just a coincidence. (As Twain once noted in a different context: “What a delightful thing a coincidence is.”) But wait, there is more.

The authors also show that “firms are taking note of congressional investments in a couple of ways … paying close attention to public disclosure laws that require members of Congress to report their stock holdings annually… [and] also hiring private companies that specialize in a unique business: identifying who owns firms’ stock (among other political intelligence activities). Firms can use information about which members of Congress own their stock to minimize the intensity of their lobbying activity,… [b]ecause owning stock aligns the interests of the firms with those of their stock-holding lawmakers …companies that have congressional stockholders no longer need to spend as much money on lobbying to influence opinion.” One example of this:  a “nearly three-quarter increase in members of Congress who held Apple stock from 2007 (22 people) to 2008 (38) was followed by a nearly 50% reduction in lobbying intensity the following year (2009).”

This is one of the most interesting use of facts and figures to show COIs that I’ve seen in a long time. Indeed, I think that, as a general matter,  more needs to be done to understand not only the incentives that COIs can create but also the disincentives, as discussed in this recent post.

And, there is more still to what Hill,  Ridge and Ingram have to say about Congressional COIs – both their consequences and also mitigation approaches. But for that you’ll need to read the original article, which I hope you’ll do.